## _cr04206

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---

### Introduction
- Albania experienced average output growth above 7 percent in 1999–2003; GDP growth estimated at 6 percent in 2003.
- The 12-month inflation rate has not exceeded the Bank of Albania’s (BoA) 2–4 percent target range since 2002 (except for one month).
- Following the 2002 depreciation, the lek appreciated on a trade-weighted basis since early 2003.
- Fiscal consolidation and public debt:
  - Overall fiscal deficit declined from 10¼ percent of GDP in 1998 to 4½ percent of GDP in 2003.
  - Public debt-to-GDP ratio fell from 76 percent to 57 percent over the same period.
- Poverty and social indicators:
  - Per capita income: US$1,740 in 2003.
  - About ¼ of the population with consumption below basic poverty levels.
- Selected poverty indicators (LCS 1998; LSMS 2002):
  - Percentage of population with consumption below basic requirements...25.4 (1998) and 13.5 (2002).
  - Percentage of population with consumption below minimum calorie requirements...4.7 (1998) and 1/ (2002).
  - Percentage of population with consumption below 60 percent of median...29.6 (1998) and 13.5 (2002).
  - Percentage of population with income below 2 USD a day...46.6 (1998) and 10.8 (2002).
  - Gini Coefficient...0.43 (1998) and 0.28 (2002).

### Recent Developments and Program Implementation
- Performance and program compliance:
  - All quantitative performance criteria for end-March 2004 were met.
  - End-December 2003 indicative target for net credit to government was met despite revenue and external assistance shortfalls.
- 2003 budget outturn (In percent of GDP):
  - Total revenue and grants: 23.6 / 22.4 / -1.2
  - Tax revenue: 20.1 / 19.5 / -0.6
  - Nontax revenue: 2.8 / 2.6 / -0.2
  - Grants: 0.7 / 0.4 / -0.3
  - Total expenditure: 28.5 / 26.5 / -2.0
  - Current expenditure 1/: 23.1 / 22.3 / -0.7
  - Capital expenditure: 5.5 / 4.2 / -1.3
  - Overall balance: -5.0 / -4.1 / 0.8
  - Domestic financing: 2.9 / 2.8 / -0.1
  - Foreign financing: 2.1 / 1.3 / -0.7
  - 1/ Program includes contingency reserves and outturn includes net lending.
- Structural reforms and privatization:
  - Savings Bank (about 60 percent of banking system deposits) sold in April 2004 to an international strategic investor.
  - ASYCUDA implementation in Durrës carried out as prior action; integrity audit postponed on EU CAM-A recommendation.
- Real sector and external developments:
  - GDP rose by 6 percent in 2003 with pronounced increases in construction, and transportation and telecommunications.
  - Merchandise export volume growth accelerated from 6 percent in 2002 to 19 percent in 2003.
  - Private sector credit grew by 30 percent but stock still about 7 percent of GDP.
  - 2003 current account deficit estimated at 7½ percent of GDP—1 percentage point of GDP below program and 1½ percentage points down from the 2002 outturn.
  - Reserve cover raised to 4⅓ months of imports.
- Political environment: December 2003 cabinet reshuffle and approaching mid-2005 general elections increased political uncertainty; opposition demonstrations in early-2004.

### Macroeconomic Outlook and Risks
- Staff view: macroeconomic outlook from the third review remains appropriate.
- Projections and expectations:
  - Growth forecast to stay close to 6 percent trend during 2004–07.
  - Inflation expected to remain within BoA’s 2–4 percent target range.
  - Merchandise export volume growth expected to moderate; merchandise import growth expected to pick up.
  - Current account deficit in 2004 expected to remain unchanged from 2003, 0.6 percentage point of GDP better than previously programmed due to strong exports and private remittances.
- Risks and sensitivities:
  - Downside risks mainly from increased political uncertainty around the election.
  - External debt projected to remain at sustainable levels in the medium-term baseline scenario (Appendix IV).
  - External debt service indicators expected to worsen moderately in the medium term as non-concessional borrowing grows after expiration of the PRGF program.
  - Stress tests show external debt position particularly sensitive to current account shocks, notably those concerning export performance.
  - A stronger-than-envisaged pickup in consumer credit could pose risks to the trade balance.
- Structural prerequisites:
  - Continued improvement in business climate and increased investment and trade links with international partners.
  - Export potential closely linked to the level of foreign direct investment.

### Fiscal Policy: 2004 Adjustments and Medium-Term Framework
- Revenue reassessment and adjustments:
  - Authorities agreed to reassess 2004 revenue projections and implement measures equivalent to 0.7 percent of GDP to meet program targets.
  - Revenue-enhancing tax policy legislation to add 0.1 percent of GDP to revenue in 2004 and have full impact in 2005 (MEFP ¶5).
  - Budget contains a 0.2 percent of GDP contingency reserve to be released only in the last quarter of 2004 under stringent conditions (MEFP, ¶5).
- Use of privatization proceeds (Savings Bank sale, total proceeds 1.6 percent of GDP):
  - Half appropriated for debt reduction (MEFP, ¶5).
  - Remainder devoted to transportation infrastructure, education, health, other investment, and judiciary in collaboration with the World Bank—raising capital spending relative to original 2004 budget (Table 7).
  - Staff recommended spreading expenditure over two years; authorities decided to spend in 2004 as agreed at third review.
- Fiscal targets and projections:
  - Adjustments expected to meet program targets and reduce public debt-to-GDP ratio by over 2 percentage points of GDP in 2004.
  - 2004 budget deficit projected at 5¾ percent of GDP—slightly below the program deficit adjusted for half of the privatization receipts.
  - Domestic borrowing requirement projected slightly below 2 percent of GDP (in line with program target adjusted for privatization).
  - External borrowing to be mainly project-related and on concessional terms.
- Medium-term fiscal strategy (In percent of GDP):
  - 2004 / 2005 / 2006 / 2007 projections:
    - Overall balance: -5.8 / -4.5 / -4.0 / -3.7
    - Domestic financing: 4.2 / 2.9 / 2.6 / 2.4
    - Privatization receipts: 2.3 / 0.3 / 0.3 / 0.1
    - Domestic net borrowing 1/ 2/: 1.9 / 2.5 / 2.3 / 2.3
    - Foreign financing: 1.6 / 1.6 / 1.3 / 1.4
    - Public debt: 54.6 / 54.0 / 53.3 / 52.8
    - Domestic public debt: 35.7 / 35.0 / 34.3 / 33.7
    - External public debt: 18.9 / 18.9 / 19.0 / 19.1
    - 1/ Quantitative performance criterion.
    - 2/ In 2004, target adjusted for 1.6 percent of GDP in privatization proceeds, half of which are used to retire domestic debt.
- Medium-term objectives:
  - Fiscal deficit projected to decline to below 4 percent of GDP by 2007.
  - Debt-to-GDP ratio projected to fall from 57 percent at end-2003 to 53 percent by 2007.
  - At least half of proceeds of all future large privatizations to be used for debt reduction (not included in projections due to timing/amount uncertainty).
- Debt sustainability:
  - Staff’s sustainability analysis (Appendix IV) indicates public debt remains stable in most plausible adverse scenarios.
  - Sustainability critically dependent on envisaged output growth and fiscal consolidation path.

### Institutional and Administrative Reforms
- Progress since late-2003 aims at increasing efficiency in mobilizing budgetary resources and improving fiscal governance; broader-based institutional reforms remain protracted and implementation capacity remains weak.
- Tax and customs administration reforms accelerated in 2004:
  - Extension of civil service status to tax and customs officials.
  - Application of the code of ethics and asset declaration requirements.
  - Increased use of IT (e.g., ASYCUDA) to facilitate tax enforcement and reduce officials’ discretion.
  - Introduction of a variety of tax policy and administration reforms, including most FAD TA recommendations (MEFP, ¶7).
- Outcomes noted since late-2003:
  - Instances of taxpayer harassment have declined.
  - Procedural irregularities, such as pre-declaration of imports, have been discontinued.
  - Transfer of social contributions collection to the tax administration has proceeded slowly, partly owing to resource constraints.

### Expenditure Management, Civil Service, and Wages
- Expenditure management modernization:
  - World Bank and bilateral donor assistance to computerize treasury operations and debt management, which remain largely manual.
  - Procurement payments above a threshold are already paid through the banking system; public wages will soon follow.
  - Civil service reform underway with World Bank assistance to increase professionalism, independence, and efficiency (MEFP, ¶15).
- Public wage indexation:
  - Automatic indexation of government wages to inflation introduced in early-2004.
  - Staff view: indexation undermines performance-based pay and incentives, may result in spending overruns, and could have a deleterious demonstration effect on the private sector; staff urged repeal; authorities agreed to reconsider during the next review discussions (MEFP, ¶15).
- Budget process changes:
  - From the 2005 budget, authorities intend to lower the maximum allowable transfer between appropriations from 7 to 5 percent of total spending (MEFP, ¶15).
  - Considering integration of the annual budget with the Medium-Term Budget Framework.

### Monetary Policy, Inflation, and Payments System
- Policy easing and interest rates:
  - Gradual monetary easing begun in 2003 continued in 2004.
  - In 2004, three 25 basis-point cuts brought the policy rate to 5¾ percent—a historical low and 2¾ percentage points below its 2002 peak.
- Inflation and exchange rate considerations:
  - Authorities expected underlying inflation to remain low in 2004 due to good agricultural output prospects (weight of foodstuffs in the basket is 41 percent).
  - Direct impact of fuel prices: 0.1 percent of GDP per US$1/bbl on the current account; energy weight in CPI is 4.6 percent.
- Strengthening monetary framework:
  - Steps to strengthen BoA’s database and economic monitoring with TA from MFD and the World Bank, consistent with advancing toward a formal inflation targeting framework.
  - Authorities agreed to phase out gradually, starting in 2005, the Treasury’s overdraft facility with the BoA; and to transfer government securities to the BoA to offset the 2004 exchange rate losses on foreign reserves due to lek appreciation—in accordance with the central bank Law (MEFP, ¶6).
- Payments system developments:
  - Real-time gross settlement system operating well; automated clearing house planned by mid-2005 (MEFP, ¶10).
  - BoA to pay salaries of all professional staff through banking system as pilot, extend to additional public employees; targets for paying public wages through banks set for end-September 2004 and end-December 2004 (PCs).

### Financial Sector Reforms and Intermediation
- Privatization of the Savings Bank expected to boost domestic banking dynamism.
- Supervisory and market infrastructure progress:
  - Significant progress on the Supervisory Development Plan with World Bank assistance; BoA adopting a more proactive supervision approach.
  - BoA receiving MFD and World Bank TA on prudential policies, anti-money laundering, and combating the financing of terrorism.
  - Authorities requested an FSAP, scheduled for 2005.
- Reducing cash use and informality:
  - Informal economy estimated at about 30 percent of GDP.
  - Campaign to reduce cash use and foster banking intermediation led by Ministry of Finance and BoA.
  - Staff urged expediting payment of government wages (about 6 percent of GDP, covering 110,000 employees) through the banking system to achieve a critical mass of banking transactions and individual bank accounts.
  - Authorities intend to move gradually and aim to eliminate cash payments by end-2005 (MEFP, ¶10).

### Other Structural Reforms
- Privatization:
  - Authorities intend to press ahead with privatization (MEFP, ¶14).
  - Privatization of Albtelekom in the short term will require settlement of outstanding commercial disputes with other private telephone operators.
- Electricity sector:
  - Electricity production increased by 50 percent since 2002.
  - Collection targets under the action plan have been met; significant tariff rationalization occurred at end-2003.
  - A planned subsidy scheme to shield low-income consumers from tariff increases will be introduced by end-September 2004 (SB) (MEFP, ¶17).
- Property restitution law:
  - Draft law based on OSCE preparing by Parliament since November 2003.
  - Law passed by Parliament—but returned by the President—provided for compensation in land or money; compensation in kind to be concluded by end-2006; cash compensation to take place over 2006-16 from a dedicated fund.
  - The law excludes compensation in the form of tax credits or exemptions but leaves undefined: (i) budgetary implications; (ii) land valuation methods; (iii) claim eligibility and decision process; and (iv) public assets available for compensation.
  - Staff advised caution and realism regarding budgetary implications; welcomed assurances that compensation would be transparent, rules-based, consistent with budget plans, and exclude tax privileges (MEFP, ¶18).
- Business climate and poverty-reduction:
  - Authorities committed to reduce administrative barriers to investment and business creation; will update action plan with FIAS (MEFP, ¶13).
  - Progress in implementing the National Strategy for Socio-Economic development (NSSED); links between NSSED, MTBP, and annual budget cycle remain weak.
- Data and statistics:
  - Severe data deficiencies hinder assessment and policy formulation.
  - INSTAT, with STA and Italian National Statistical Institute assistance, conducting a project to improve national accounts methodology and coverage of the informal economy; outcomes have not improved since mid-2003 publication of 1998–2001 national accounts, and 2002 figures have not been produced yet (MEFP, ¶22). Staff emphasized need for radical progress.

### External Financing, Trade Policy, and Debt Sustainability
- Program financing and debt:
  - The program is fully financed. Projected debt flows indicate Albania should not have difficulty meeting current and future external debt service obligations to the Fund (Tables 8, 9, 10 and 11).
  - Authorities committed to reschedule remaining external arrears within the program period and maintain good faith negotiations on arrears on former nonconvertible currencies (MEFP, ¶20). Agreements with Hungary and with FYR Macedonia private creditors were ratified by the Albanian parliament in March 2004.
- Trade and integration:
  - Authorities reaffirmed commitment to a liberal multilateral trade regime and further regional and European integration (MEFP, ¶19).
  - Parliament ratified free trade agreements with Serbia and Montenegro, and Moldova in February 2004.
- Debt sustainability and indicators:
  - External debt NPV: 17.5 percent of GDP in 2003.
  - Debt-service-to-exports ratio: about 5 percent in 2003.
  - Fiscal debt (government and government-guaranteed) declined from 85 percent of GDP in 1997 to 57 percent of GDP in 2003.
  - External debt (nominal) as percent of GDP series: 1995: 32.6; 1996: 28.1; 1997: 40.8; 1998: 34.5; 1999: 31.6; 2000: 31.8; 2001: 26.8; 2002: 23.3; 2003: 20.2; 2004: 21.0.
  - NPV of external debt projections: 2003: 17.5; 2004: 17.7; 2005: 17.6; 2010: 17.2; 2015: 14.7; 2018: 12.5; 2023: 8.7.
  - Staff’s stress tests highlight vulnerability to higher-than-programmed current account deficits and underscore the need to raise export capacity and diversify the export base.

### Program Monitoring, Conditionality, and Disbursements
- Schedule of Purchases Under PRGF Arrangement (Table 12):
  - Albania's quota: SDR 48.7 million.
  - Disbursements of 4.0 SDR at scheduled reviews (June 2002; January 2003; July 2003; January 2004; July 2004; January 2005; prior to June 20, 2005).
  - Total under arrangement: 28.0 SDR — 57.4 percent of quota.
  - Final disbursement must be carried out before expiration of the arrangement on June 20, 2005.
- Proposed disbursement conditionality:
  - Sixth disbursement conditional upon observance of end-September 2004 quantitative and structural performance criteria, the end-December 2004 structural performance criterion, and completion of the fifth review (Table 12).
  - Seventh disbursement conditional upon observance of end-March 2005 quantitative performance criteria and completion of the sixth review.
- Structural conditionality priorities (consistent with PRSP and World Bank collaboration):
  - Strengthen governance and improve the business climate, including promoting financial deepening via use of the banking system for economic transactions and action plan to remove administrative barriers to investment.
  - Improve governance of fiscal institutions and revenue collection, including:
    - Introducing ASYCUDA in the Durrës customs office.
    - Improving VAT legal and regulatory features and monitoring.
    - Following transparent procedures for the efficient use of nonconcessional foreign loans.
    - Reporting quarterly on the stock of external arrears.
- Selected prior actions and performance criteria:
  - Prior actions for the Fourth Review (Completed): Allocate proceeds from sale of the Savings Bank in accordance with attached MEFP; Bank of Albania to pay salaries of all its professional staff through the banking system; ASYCUDA computer administration system to be made operational in the Durrës port.
  - Proposed performance criteria for the Fifth Review: Salaries of 3,500 Government employees and of all employees of the Bank of Albania to be paid through the banking system — End-September 2004; Salaries of at least 10,000 employees of budgetary institutions to be paid through the banking system — End-December 2004.

### Key Quantitative Indicators and Selected Table Figures (exact extracts)
- Real GDP growth (selected series): "12.7 10.1 7.3 7.6 4.7 6.0 6.0 6.0 6.2 6.0 6.0 6.0"
- Retail prices (avg.): "20.9 0.4 0.0 3.1 5.2 2.3 2.4 3.0 3.4 3.0 3.0 3.0"
- Overall balance (including grants) (percent of GDP): "-10.3 -9.4 -8.2 -7.6 -6.1 -5.0 -4.1 -5.1 -5.8 -4.5 -4.0 -3.7"
- Public Debt (percent of GDP): "75.9 72.7 71.3 64.4 60.6 59.3 56.8 58.4 54.6 54.0 53.3 52.8"
- Gross international reserves (millions of US dollars): "388 485 608 737 860 974 1,026 1,019 1,132 1,227 1,296 1,384"
- Current account balance (excluding official transfers) (in percent of GDP): "-7.1 -7.9 -7.4 -6.2 -9.0 -8.5 -7.6 -8.1 -7.5 -7.3 -7.1 -6.6"

### Monetary Aggregates and Balance of Payments (selected exact figures)
- Broad money (end-period, in billions of leks): 394.3 (2002); 408.1 (2003 Dec.); 411.3 (2004 Mar); 422.0 (2004 June); 437.1 (2004 Sep); 445.0 (2004 Dec); 443.5 (2005 Mar); 450.2 (2005 Jun); 470.3 (2005 Sep); 484.2 (2005 Dec); 495.8 (2006 March); 511.0 (2006 Dec.); 544.9 (2007 Dec.); 601.2 (Staff projection); 672.4 (projection).
- Current account (annual, US$ millions): -274 (2000); -263 (2001); -435 (2002); -469 (2003); -592 (2004); -635 (2005); -672 (2006); -685 (2007); -718 (2008); -740 (2009).
- Exports (annual, US$ millions): 705; 839; 915; 1,167; 1,276; 1,501; 1,665; 1,858; 2,077; 2,497.
- Imports (annual, US$ millions): 1,521; 1,790; 2,075; 2,586; 2,807; 3,360; 3,651; 3,988; 4,343; 5,059.
- Private transfers (annual, US$ millions): 439; 543; 597; 782; 793; 1,014; 1,065; 1,150; 1,233; 1,389.

### Staff Appraisal and Policy Recommendations (selected, exact wording preserved where applicable)
- Economic assessment:
  - Economy recovered from 2002 slowdown; macroeconomic performance described as good.
  - Growth driven by domestic demand; exports picking up from low levels.
  - Supply recovery supported by improved energy production from favorable weather and restructuring.
  - Current account strengthened in 2003 due to trade gains and increased private remittances.
- Key recommendations:
  - Improve the business climate and attract export-generating FDI; improve efficiency of the public sector, governance, and rule of law.
  - Continue budget retrenchment to sustain fiscal consolidation in face of resource shortfalls.
  - Devote at least half of all future large privatization proceeds to further debt reduction (authorities’ decision welcomed).
  - Ensure capital spending financed by privatization proceeds is undertaken effectively and in consultation with the World Bank.
  - Base the 2005 budget on a sound and credible revenue forecast to avoid haphazard spending cuts.
  - Accelerate tax revenue mobilization and improve effectiveness and accountability of budgetary institutions.
  - Sustain commitment to multipronged reform agenda: treasury and expenditure management, civil service reform, anti-corruption measures.
  - Discontinue public wage indexation as it undermines public administration reform, weakens budget discipline, and could prompt inflationary pressures.
  - Improve budget transparency: better integrate annual budget with medium-term strategy, realistic revenue projections, and effective expenditure prioritization.
  - BoA should continue gradualist monetary easing while monitoring domestic supply conditions, international energy prices, and interest rate differentials.
  - Strengthen financial supervision and market infrastructure; planned FSAP to be instrumental.
  - Channel payment of public wages through banks to boost financial intermediation, curb informality, and strengthen treasury management and governance.

### Principal and Fund Relations (selected exact numbers)
- PRGF Repayments (annual sequence as presented): 4.8, 6.2, 7.6, 9.4, 9.6, 9.1, 6.7, 4.6, 2.8, 2.0, 0.4, 0.0, 63.3.
- Total Obligations (annual sequence as presented): 5.2, 6.4, 7.8, 9.6, 9.8, 9.2, 6.8, 4.6, 2.8, 2.0, 0.4, 0.0, 64.7.
- Albania's quota: SDR 48.7 million.
- PRGF: Approval Date 06/21/2002; Expiration Date 06/20/2005; Amount Approved 28.00; Amount Drawn 16.00.
- Membership Status: Joined: 10/15/1991; Article XIV.
- The unified exchange rate stood at 106.1 lek per U.S. dollar on March 17, 2004.

*Source: IMF staff report excerpt (pages provided).*

### 1. Property Restitution Law ............................................................................................

### 1. Property Restitution Law

### Introduction
- Albania experienced average output growth above 7 percent in 1999–2003; GDP growth estimated at 6 percent in 2003.
- The 12-month inflation rate has not exceeded the Bank of Albania’s (BoA) 2–4 percent target range since 2002 (except for one month).
- Following the 2002 depreciation, the lek appreciated on a trade-weighted basis since early 2003.
- Fiscal consolidation and public debt:
  - Overall fiscal deficit declined from 10¼ percent of GDP in 1998 to 4½ percent of GDP in 2003.
  - Public debt-to-GDP ratio fell from 76 percent to 57 percent over the same period.
- Structural impediments to private-sector, export-driven expansion:
  - Deficient infrastructure (transportation, telecommunications, utilities).
  - Pervasive informal sector, weak administrative capacity, governance issues.
- Poverty and social indicators:
  - Per capita income: US$1,740 in 2003.
  - About ¼ of the population with consumption below basic poverty levels.
  - Tax revenue about 20 percent of GDP in 1998–2003 despite a 2 percentage point increase over that period.
- Selected poverty indicators (LCS 1998; LSMS 2002):
  - Percentage of population with consumption below basic requirements...25.4 (1998) and 13.5 (2002).
  - Percentage of population with consumption below minimum calorie requirements...4.7 (1998) and 1/ (2002—note: data table format; preserve entries as in source).
  - Percentage of population with consumption below 60 percent of median...29.6 (1998) and 13.5 (2002).
  - Percentage of population with income below 2 USD a day...46.6 (1998) and 10.8 (2002).
  - Gini Coefficient...0.43 (1998) and 0.28 (2002).

### Recent Developments
- Performance and program compliance:
  - All quantitative performance criteria for end-March 2004 were met.
  - End-December 2003 indicative target for net credit to government was met despite revenue and external assistance shortfalls.
- 2003 budget outturn (In percent of GDP):
  - Program vs Outturn vs Difference w/r Program
  - Total revenue and grants: 23.6 / 22.4 / -1.2
  - Tax revenue: 20.1 / 19.5 / -0.6
  - Nontax revenue: 2.8 / 2.6 / -0.2
  - Grants: 0.7 / 0.4 / -0.3
  - Total expenditure: 28.5 / 26.5 / -2.0
  - Current expenditure 1/: 23.1 / 22.3 / -0.7
  - Capital expenditure: 5.5 / 4.2 / -1.3
  - Overall balance: -5.0 / -4.1 / 0.8
  - Domestic financing: 2.9 / 2.8 / -0.1
  - Foreign financing: 2.1 / 1.3 / -0.7
  - 1/ Program includes contingency reserves and outturn includes net lending.
- Structural reforms and privatization:
  - Savings Bank (about 60 percent of banking system deposits) sold in April 2004 to an international strategic investor.
  - An end-March structural performance criterion on implementing ASYCUDA in Durrës and initiating a system integrity audit was not fully met: ASYCUDA implementation in Durrës carried out as prior action; integrity audit postponed on EU CAM-A recommendation.
- Institution-building progress slow in areas beyond program scope: judiciary reform, rule of law enforcement, property rights protection.
- Exclusion from US Millennium Challenge Account cited insufficient progress in curbing corruption.
- Real sector and external developments:
  - GDP rose by 6 percent in 2003 with pronounced increases in construction, and transportation and telecommunications.
  - Merchandise export volume growth accelerated from 6 percent in 2002 to 19 percent in 2003.
  - Private sector credit grew by 30 percent but stock still about 7 percent of GDP.
  - 2003 current account deficit estimated at 7½ percent of GDP—1 percentage point of GDP below program and 1½ percentage points down from the 2002 outturn.
  - Reserve cover raised to 4⅓ months of imports.
- Political environment: December 2003 cabinet reshuffle and approaching mid-2005 general elections increased political uncertainty; opposition demonstrations in early-2004.

### Report on the Discussions
- Main discussion topics:
  - Reassessing revenue projections in view of 2003–2004Q1 outturns and associated fiscal adjustments.
  - Allocating receipts from the Savings Bank sale (1.6 percent of GDP).
  - Updating the structural reform and poverty-reduction agenda.
- Understandings reached:
  - Fiscal revenue and expenditure adjustment amounting to 0.7 percent of GDP to meet program targets.
  - Structural measures to improve management of fiscal institutions, governance, and transparency.
  - Consolidation of central bank independence and fostering bank intermediation.

### Macroeconomic Outlook
- Staff view: macroeconomic outlook from the third review remains appropriate.
- Projections and expectations:
  - Growth forecast to stay close to 6 percent trend during 2004–07.
  - Inflation expected to remain within BoA’s 2–4 percent target range.
  - Merchandise export volume growth expected to moderate; merchandise import growth expected to pick up.
  - Current account deficit in 2004 expected to remain unchanged from 2003, 0.6 percentage point of GDP better than previously programmed due to strong exports and private remittances.
- Risks and sensitivities:
  - Downside risks mainly from increased political uncertainty around the election.
  - External debt projected to remain at sustainable levels in the medium-term baseline scenario (Appendix IV).
  - External debt service indicators expected to worsen moderately in the medium term as non-concessional borrowing grows after expiration of the PRGF program.
  - Stress tests show external debt position particularly sensitive to current account shocks, notably those concerning export performance.
  - A stronger-than-envisaged pickup in consumer credit could pose risks to the trade balance.
- Structural prerequisites for the outlook:
  - Continued improvement in business climate and increased investment and trade links with international partners.
  - Export potential closely linked to the level of foreign direct investment.

### Fiscal Policy
- Revenue reassessment and adjustments:
  - Due to disappointing 2003 revenue outturn, authorities agreed to reassess 2004 revenue projections and implement measures equivalent to 0.7 percent of GDP to meet program targets.
  - Authorities introducing revenue-enhancing tax policy legislation (MEFP ¶5) that will add 0.1 percent of GDP to revenue in 2004 and have full impact in 2005.
  - Budget contains a 0.2 percent of GDP contingency reserve to be released only in the last quarter of 2004 under stringent conditions (MEFP, ¶5).
- Use of privatization proceeds (Savings Bank sale, total proceeds 1.6 percent of GDP):
  - Half of privatization proceeds appropriated for debt reduction (MEFP, ¶5).
  - Remainder devoted to key projects: transportation infrastructure, education, health, other investment, and judiciary in collaboration with the World Bank—raising capital spending relative to original 2004 budget (Table 7).
  - Staff recommended spreading expenditure over two years; authorities decided to spend in 2004 as agreed at third review.
- Fiscal targets and projections:
  - Adjustments expected to meet program targets and reduce public debt-to-GDP ratio by over 2 percentage points of GDP in 2004.
  - 2004 budget deficit projected at 5¾ percent of GDP—slightly below the program deficit adjusted for half of the privatization receipts.
  - Domestic borrowing requirement projected slightly below 2 percent of GDP (in line with program target adjusted for privatization).
  - External borrowing to be mainly project-related and on concessional terms.
  - Reduction in outstanding T-bills relative to GDP expected to support expansion of private sector credit in domestic currency and declining interest rates.
- Medium-term fiscal strategy (In percent of GDP):
  - 2004 / 2005 / 2006 / 2007 projections:
    - Overall balance: -5.8 / -4.5 / -4.0 / -3.7
    - Domestic financing: 4.2 / 2.9 / 2.6 / 2.4
    - Privatization receipts: 2.3 / 0.3 / 0.3 / 0.1
    - Domestic net borrowing 1/ 2/: 1.9 / 2.5 / 2.3 / 2.3
    - Foreign financing: 1.6 / 1.6 / 1.3 / 1.4
    - Public debt: 54.6 / 54.0 / 53.3 / 52.8
    - Domestic public debt: 35.7 / 35.0 / 34.3 / 33.7
    - External public debt: 18.9 / 18.9 / 19.0 / 19.1
    - 1/ Quantitative performance criterion.
    - 2/ In 2004, target adjusted for 1.6 percent of GDP in privatization proceeds, half of which are used to retire domestic debt.
- Medium-term objectives:
  - Fiscal deficit projected to decline to below 4 percent of GDP by 2007.
  - Debt-to-GDP ratio projected to fall from 57 percent at end-2003 to 53 percent by 2007.
  - At least half of proceeds of all future large privatizations to be used for debt reduction (not included in projections due to timing/amount uncertainty).
- Debt sustainability:
  - Staff’s sustainability analysis (Appendix IV) indicates public debt remains stable in most plausible adverse scenarios.
  - Sustainability critically dependent on envisaged output growth and fiscal consolidation path.

*Source: IMF staff report excerpt (pages provided).*

### 19.      Since late-2003, there has been progress on institutional and administrative

### _cr04206 - 19.      Since late-2003, there has been progress on institutional and administrative

### Institutional and administrative reforms
- Progress since late-2003 aims at increasing efficiency in mobilizing budgetary resources and improving fiscal governance; broader-based institutional reforms remain protracted and implementation capacity remains weak.
- Tax and customs administration reforms accelerated in 2004 to improve professionalism and fight tax noncompliance.
- Recent measures:
  - Extension of civil service status to tax and customs officials.
  - Application of the code of ethics and asset declaration requirements to limit political interference and curb corruption.
  - Increased use of IT (e.g., ASYCUDA) to facilitate tax enforcement and reduce officials’ discretion.
  - Introduction of a variety of tax policy and administration reforms, including most FAD TA recommendations (MEFP, ¶7).
- Outcomes noted by the mission since late-2003:
  - Instances of taxpayer harassment have declined.
  - Procedural irregularities, such as pre-declaration of imports, have been discontinued.
  - Transfer of social contributions collection to the tax administration has proceeded slowly, partly owing to resource constraints.

### Expenditure management, civil service, and wages
- Expenditure management modernization:
  - World Bank and bilateral donor assistance to computerize treasury operations and debt management, which remain largely manual.
  - Procurement payments above a threshold are already paid through the banking system; public wages will soon follow.
  - Civil service reform underway with World Bank assistance to increase professionalism, independence, and efficiency (MEFP, ¶15).
- Public wage indexation:
  - Automatic indexation of government wages to inflation introduced in early-2004.
  - Authorities argued it would not affect the budget wage bill in the foreseeable future and could result in savings.
  - Staff view: indexation undermines performance-based pay and incentives, may result in spending overruns (indexation introduced as a pay increase floor), and could have a deleterious demonstration effect on the private sector, hindering monetary stability. Staff urged repeal; authorities agreed to reconsider during the next review discussions (MEFP, ¶15).
- Budget process changes:
  - From the 2005 budget, authorities intend to lower the maximum allowable transfer between appropriations from 7 to 5 percent of total spending (MEFP, ¶15).
  - Considering integration of the annual budget with the Medium-Term Budget Framework.

### Monetary policy and inflation
- Policy easing and interest rates:
  - Gradual monetary easing begun in 2003 continued in 2004.
  - In 2004, three 25 basis-point cuts brought the policy rate to 5¾ percent—a historical low and 2¾ percentage points below its 2002 peak.
- Inflation and exchange rate considerations:
  - Authorities expected underlying inflation to remain low in 2004 due to good agricultural output prospects (weight of foodstuffs in the basket is 41 percent).
  - Lek appreciation supported confidence; direct effect on CPI limited because tradables (excluding foodstuffs) are a small part of the basket and tradable prices respond asymmetrically to exchange rate changes.
  - A broadly stable trade-weighted exchange rate, as projected in the program, would be consistent with the inflation target.
  - Staff recommendation: BoA should continue to exert caution and watch carefully international interest rates and energy prices.
  - Direct impact of fuel prices: 0.1 percent of GDP per US$1/bbl on the current account; energy weight in CPI is 4.6 percent.
- Strengthening monetary framework:
  - Steps to strengthen BoA’s database and economic monitoring with TA from MFD and the World Bank, consistent with advancing toward a formal inflation targeting framework.
  - Authorities agreed to phase out gradually, starting in 2005, the Treasury’s overdraft facility with the BoA; and to transfer government securities to the BoA to offset the 2004 exchange rate losses on foreign reserves due to lek appreciation—in accordance with the central bank Law (MEFP, ¶6).

### Financial sector reforms and financial intermediation
- Reforms in anticipation of take-off in credit and banking intermediation (MEFP, ¶11).
- Privatization of the Savings Bank expected to boost domestic banking dynamism.
- Supervisory and market infrastructure progress:
  - Significant progress on the Supervisory Development Plan with World Bank assistance; BoA adopting a more proactive supervision approach.
  - BoA receiving MFD and World Bank TA on prudential policies, anti-money laundering, and combating the financing of terrorism.
  - Real-time gross settlement system operating well; automated clearing house planned by mid-2005 (MEFP, ¶10).
  - Authorities requested an FSAP, scheduled for 2005.
- Reducing cash use and informality:
  - Informal economy estimated at about 30 percent of GDP.
  - Campaign to reduce cash use and foster banking intermediation led by Ministry of Finance and BoA.
  - Staff urged expediting payment of government wages (about 6 percent of GDP, covering 110,000 employees) through the banking system to achieve a critical mass of banking transactions and individual bank accounts, improve treasury management, and eliminate opportunities for misgovernance.
  - Authorities intend to move gradually and aim to eliminate cash payments by end-2005 (MEFP, ¶10), citing concerns about banks’ readiness to provide adequate service.

### Other structural reforms
- Privatization:
  - Authorities intend to press ahead with privatization (MEFP, ¶14).
  - Privatization of Albtelekom in the short term will require settlement of outstanding commercial disputes with other private telephone operators.
- Electricity sector:
  - Electricity production increased by 50 percent since 2002.
  - Collection targets under the action plan have been met; significant tariff rationalization occurred at end-2003.
  - A planned subsidy scheme to shield low-income consumers from tariff increases, delayed and contributing to protests, will be introduced by end-September 2004 (SB) (MEFP, ¶17).
  - Inter-enterprise arrears monitored; have not re-emerged. Water supply company weaknesses warrant intense vigilance.
- Property restitution law:
  - Draft law based on OSCE preparing by Parliament since November 2003 (Box 1).
  - Law passed by Parliament—but returned by the President—provided for compensation in land or money; compensation in kind to be concluded by end-2006; cash compensation to take place over 2006-16 from a dedicated fund.
  - The law excludes compensation in the form of tax credits or exemptions but leaves undefined: (i) budgetary implications; (ii) land valuation methods; (iii) claim eligibility and decision process; and (iv) public assets available for compensation.
  - Staff advised caution and realism regarding budgetary implications; welcomed assurances that compensation would be transparent, rules-based, consistent with budget plans, and exclude tax privileges (MEFP, ¶18).
- Business climate and poverty-reduction:
  - Authorities committed to reduce administrative barriers to investment and business creation; will update action plan with FIAS (MEFP, ¶13).
  - Progress in implementing the National Strategy for Socio-Economic development (NSSED); improvements in 2003 include better definition of policies through 2007 and improved coordination across institutions, but links between NSSED, MTBP, and annual budget cycle remain weak.
- Data and statistics:
  - Severe data deficiencies hinder assessment and policy formulation.
  - INSTAT, with STA and Italian National Statistical Institute assistance, conducting a project to improve national accounts methodology and coverage of the informal economy; outcomes have not improved since mid-2003 publication of 1998–2001 national accounts, and 2002 figures have not been produced yet (MEFP, ¶22). Staff emphasized need for radical progress.

### External financing, trade policy, and business climate indicators
- Program financing and debt:
  - The program is fully financed. Projected debt flows indicate Albania should not have difficulty meeting current and future external debt service obligations to the Fund (Tables 8, 9, 10 and 11).
  - Authorities committed to reschedule remaining external arrears within the program period and maintain good faith negotiations on arrears on former nonconvertible currencies (MEFP, ¶20). Agreements with Hungary and with FYR Macedonia private creditors were ratified by the Albanian parliament in March 2004.
- Trade and integration:
  - Authorities reaffirmed commitment to a liberal multilateral trade regime and further regional and European integration (MEFP, ¶19).
  - Parliament ratified free trade agreements with Serbia and Montenegro, and Moldova in February 2004.
- Business climate indicators (2003) — selected figures as reported:
  - Starting a Business: Number of procedures 11 10 7; Duration (days) 47 48 30; Cost (% GNI per capita) 65 21.7 10.2.
  - Hiring & Firing Costs: Flexibility of hiring 1/3 35 14 9; Flexibility of firing 1/1 5 39 28.
  - Enforcing Contracts: Number of procedures 37 25 17; Duration (days) 220 344 233; Cost (% GNI per capita) 72.6 27.9 7.1.
  - Procedural Complexity Index (Max=100): 76 56 49.
  - Getting Credit: Public credit registry index 2/0 49 58; Private bureau coverage (borrowers per 1000 capita) 0 38.6 44 3.5.
  - Closing a Business: Goals of insolvency index 3/4 25 177; Court powers index 4/6 75 736.
  - Source: Doing Business, 2003.

### Program monitoring and conditionality
- Proposed disbursement conditionality:
  - Sixth disbursement conditional upon observance of end-September 2004 quantitative and structural performance criteria, the end-December 2004 structural performance criterion, and completion of the fifth review (Table 12).
  - Seventh disbursement conditional upon observance of end-March 2005 quantitative performance criteria and completion of the sixth review.
- Structural conditionality priorities (consistent with PRSP and World Bank collaboration; Box 2):
  - Strengthen governance and improve the business climate, including promoting financial deepening via use of the banking system for economic transactions (¶26, MEFP ¶10) and action plan to remove administrative barriers to investment (¶30, MEFP ¶13; NSSED Chapter 7).
  - Improve governance of fiscal institutions and revenue collection, including:
    - Introducing ASYCUDA in the Durrës customs office (¶6, ¶19; NSSED Chapter 7).
    - Improving VAT legal and regulatory features and monitoring.
    - Following transparent procedures for the efficient use of nonconcessional foreign loans (MEFP ¶20, TMU¶18).
    - Reporting quarterly on the stock of external arrears (¶33).
  - Structural conditionality performance has improved since the third review (Table 1, MEFP ¶2).
- World Bank structural conditionality focuses on governance and institution building; sustainable private sector development; human development; and restructuring of key sectors (Appendix II).

### Staff appraisal and policy recommendations
- Economic assessment:
  - Economy recovered from 2002 slowdown; macroeconomic performance described as good.
  - Growth driven by domestic demand; exports picking up from low levels.
  - Supply recovery supported by improved energy production from favorable weather and restructuring.
  - Current account strengthened in 2003 due to trade gains and increased private remittances.
- Outlook:
  - Output growth expected to remain close to its trend at about 6 percent.
  - Inflation expected within the 2–4 percent target range—contingent on progress in structural reforms.
  - External position sustainable but dependent on maintaining export expansion.
- Key recommendations:
  - Improve the business climate and attract export-generating FDI; improve efficiency of the public sector, governance, and rule of law.
  - Continue budget retrenchment to sustain fiscal consolidation in face of resource shortfalls.
  - Devote at least half of all future large privatization proceeds to further debt reduction (authorities’ decision welcomed).
  - Ensure capital spending financed by privatization proceeds is undertaken effectively and in consultation with the World Bank.
  - Base the 2005 budget on a sound and credible revenue forecast to avoid haphazard spending cuts.
  - Accelerate tax revenue mobilization and improve effectiveness and accountability of budgetary institutions.
  - Sustain commitment to multipronged reform agenda: treasury and expenditure management, civil service reform, anti-corruption measures.
  - Discontinue public wage indexation as it undermines public administration reform, weakens budget discipline, and could prompt inflationary pressures.
  - Improve budget transparency: better integrate annual budget with medium-term strategy, realistic revenue projections, and effective expenditure prioritization.
  - BoA should continue gradualist monetary easing while monitoring domestic supply conditions, international energy prices, and interest rate differentials.
  - Strengthen financial supervision and market infrastructure; planned FSAP to be instrumental.
  - Channel payment of public wages through banks to boost financial intermediation, curb informality, and strengthen treasury management and governance.

*Source: IMF staff report content provided in the supplied document excerpt.*

### 43.      The renewed privatization momentum should be maintained. The aim should be

### The renewed privatization momentum should be maintained. The aim should be

### Privatization and state-owned enterprises
- Recommendation: sell in the short term the public stakes in the financial and oil sectors.
- Recommendation: authorities are encouraged to prepare Albtelekom for early privatization.
- Table entry: Privatization receipts projected/recorded as "0.0 0.2 1.7 2.1 0.1 0.2 0.1 0.7 2.3 0.3 0.3 0.1" (percent of GDP across years shown in Table 1).

### Arrears and creditor negotiations
- Finding: The authorities are pursuing good faith efforts to reach agreements with official and private creditors on remaining arrears.
- Structural benchmark: Prepare quarterly reports (within one month of the end of each quarter) on the stock of external arrears — Status: Completed.

### Poverty reduction strategy and program assessment
- Finding: Fund and World Bank staffs consider that progress made towards the implementation of the NSSED has been sufficient through 2003, and is demonstrative of Albania’s continued commitment to poverty reduction.
- Finding: The supplementary MEFP contains a strong policy program to preserve macroeconomic stability and growth, consistent with the PRSP progress report.
- Assessment: Program implementation has been overall satisfactory, despite:
  - persistent difficulties in expanding budget revenue, and
  - delay in implementing structural conditionality related to the ASYCUDA system.
- Staff view: The delay on ASYCUDA did not compromise program objectives.
- Staff decision: conditionality on initiating an integrity audit is no longer appropriate; staff supports the authorities' request for:
  - completion of the fourth review and financing assurances review, and
  - a waiver for the non-observance of a structural performance criterion.

### ASYCUDA implementation and conditionality
- Prior action for the Third Review:
  - Make ASYCUDA computer administration system operational in the Tirana customs house — End-January 2004 — Status: Completed.
- Performance criteria for the Fourth Review:
  - Make ASYCUDA computer administration system operational in the Durrës port; and initiate an integrity audit of the ASYCUDA system in both the Tirana customs house and the Durrës port — End-March 2004 — Status: Waiver requested. ASYCUDA system implemented in Durrës as a prior action.
- Structural benchmark (related):
  - Implementing the recommendations of the integrity audit of the ASYCUDA computer administration system in the Tirana customs office and in the Durrës port — End-June 2004 — Status: "..." (no completion status reported in the excerpt).
  - Improve the VAT refunds process by reporting on the stock of VAT refunds claimed and refunds paid out every month — End-March 2004 and ongoing — Status: Completed.

### Fiscal and administrative benchmarks (selected, exact wording preserved)
- Extend the Civil Service Law or its equivalent to selected central government organizational units, with priority given to INSTAT, GDT and GDC, and adopt all supporting instructions and decisions to that effect — End-June 2004 — Status: Completed.
- Adopt a government decision not to release up to Lek 1 billion from each of the reserve fund and contingency fund by the amount that final tax revenue collected in 2003 by the GDT, GDC and SSU (including taxes collected on behalf of local government) falls short of Lek 144.5 million — End-June 2004 — Status: Completed.
- Ensure implementation of the Action Plan for removing administrative barriers to investment — End-June 2004 — Status: Completed.
- Execute the government-assisted netting and final settlement of public sector inter-enterprise arrears as of end-2001 — Status: Completed.

### Macro-fiscal context and indicators (selected exact figures from Table 1)
- Real GDP growth (selected series from Table 1): "12.7 10.1 7.3 7.6 4.7 6.0 6.0 6.0 6.2 6.0 6.0 6.0"
- Retail prices (avg.): "20.9 0.4 0.0 3.1 5.2 2.3 2.4 3.0 3.4 3.0 3.0 3.0"
- Overall balance (including grants) (percent of GDP): "-10.3 -9.4 -8.2 -7.6 -6.1 -5.0 -4.1 -5.1 -5.8 -4.5 -4.0 -3.7"
- Public Debt (percent of GDP): "75.9 72.7 71.3 64.4 60.6 59.3 56.8 58.4 54.6 54.0 53.3 52.8"
- Gross international reserves (millions of US dollars): "388 485 608 737 860 974 1,026 1,019 1,132 1,227 1,296 1,384"
- Current account balance (excluding official transfers) (in percent of GDP): "-7.1 -7.9 -7.4 -6.2 -9.0 -8.5 -7.6 -8.1 -7.5 -7.3 -7.1 -6.6"

*Source: IMF staff report content as presented in the provided excerpt.*

### 6. Safeguard the efficient use of nonconcessional foreign project loans through:

### 6. Safeguard the efficient use of nonconcessional foreign project loans through:

### Safeguards and operational requirements
- (i) Conducting an independent feasibility study for any large project (as defined in the TMU) financed through non-concessional borrowing.  
  - Status: Throughout  
  - Completion status: Completed
- (ii) Provide a quarterly listing and status report on all projects being considered for nonconcessional foreign financing.  
  - Status: Throughout  
  - Completion status: Completed

### Monetary aggregates (key end-period levels and growth)
- Broad money (end-period, in billions of leks): 394.3 (2002); 408.1 (2003 Dec.); 411.3 (2004 Mar); 422.0 (2004 June); 437.1 (2004 Sep); 445.0 (2004 Dec.); 443.5 (2005 Mar); 450.2 (2005 Jun); 470.3 (2005 Sep); 484.2 (2005 Dec.); 495.8 (2006 March); 511.0 (2006 Dec.); 544.9 (2007 Dec.); 601.2 (Staff projection); 672.4 (projection)
- Currency outside banks (billions of leks): 119.1; 130.8; 121.3; 118.9; 121.3; 126.8; 125.2; 117.2; 127.1; 130.8; 135.0; 138.1; 147.8; 162.5; 181.0
- Deposits (billions of leks): 275.2; 277.4; 290.0; 303.1; 315.8; 318.2; 318.3; 333.0; 343.2; 353.4; 360.8; 372.9; 397.1; 438.7; 491.3
- Net foreign assets (billions of leks): 158.6; 164.4; 165.0; 156.5; 166.4; 164.4; 161.8; 165.8; 181.7; 184.8; 185.2; 184.3; 189.7; 189.9; 194.3
- Net domestic assets (billions of leks): 235.7; 243.8; 246.4; 265.5; 270.7; 280.6; 281.7; 284.4; 288.6; 299.3; 310.6; 326.7; 355.1; 411.3; 478.1
- Broad money growth during the year (percent): 20.2; 5.7; 0.8; 3.4; 7.1; 9.0; 8.7; 1.5; 6.0; 9.2; 11.8; 3.1; 9.9; 10.3; 11.8
- Annual broad money growth (y-o-y; percent): 20.2; 5.7; 6.8; 9.0; 9.8; 9.0; 8.7; 9.5; 11.4; 10.8; 11.8; 13.4; 9.9; 10.3; 11.8
- Gross reserves (millions of U.S. dollars): 737; 860; 908; 935; 964; 974; 1,025.5; 1,028.0; 1,154; 1,117; 1,132; 1,158; 1,227; 1,296; 1,384

### Balance of payments (selected flows and projections; in millions of US dollars)
- Current account (annual): -274 (2000); -263 (2001); -435 (2002); -469 (2003); -592 (2004); -635 (2005); -672 (2006); -685 (2007); -718 (2008); -740 (2009)
- Balance of goods and services (annual): -816; -951; -1,159; -1,419; -1,444; -1,695; -1,985; -2,130; -2,266; -2,562
- Exports (annual): 705; 839; 915; 1,167; 1,276; 1,501; 1,665; 1,858; 2,077; 2,497
  - Goods: 255; 305; 330; 447; 539? (table shows 539 in a column grouping); 750; 750; 862; 992; 1,211
  - Services: 450; 535; 585; 720; 737? (table entries vary by quarter)
- Imports (annual): 1,521; 1,790; 2,075; 2,586; 2,807; 3,360; 3,651; 3,988; 4,343; 5,059
- Private transfers (annual): 439; 543; 597; 782; 793; 1,014; 1,065; 1,150; 1,233; 1,389
- Capital account (annual): 319; 283; 402; 461; 508; 649; 714; 752; 773; 814
- Official medium- and long-term loans (net, annual): 71; 83; 93; 85; 122; 108; 136; 127; 117; 115
  - New borrowing (annual): 79; 90; 121; 114; 187; 207; 221; 233; 235; 254
    - Multilateral loans (annual): 60; 56; 84; 85; 128; 138; 144; 140; 152; 161
    - Bilateral loans (annual): 19; 34; 37; 30; 59? (columns vary); 78; 83; 88; 94; 102
- Change in gross reserves (increase = -; annual): -123; -129; -123; -78; -3; -126; 37?; -15; -45; -107
- Use of Fund Resources (net, annual): 12; -1; -9; 24; -2; -2; -3; -9; -3; -2

### Fiscal accounts: government revenues, expenditures, and budget balances (in percent of GDP)
- Total Revenue and Grants (percent of GDP): 22.8; 22.8; 25.2; 23.6; 22.4; 24.1; 19.8; 23.1; 20.1; 22.7; 22.8; 22.9
- Tax Revenue (percent of GDP): 19.0; 19.0; 21.4; 20.1; 19.5; 20.8; 18.0; 20.2; 18.1; 20.1; 20.3; 20.4
  - Turnover tax / VAT (percent of GDP): 6.7; 6.8; 7.6; 6.8; 6.8; 7.0; 6.0; 6.8; 5.8; 6.8; 7.0; 7.0
  - Social insurance contributions (percent of GDP): 3.7; 3.8; 4.3; 4.0; 3.8; 4.1; 3.6; 4.0; 3.9; 4.0; 4.1; 4.2
- Total Expenditure (percent of GDP): 30.4; 28.9; 31.1; 28.5; 26.5; 29.3; 23.4; 28.8; 26.3; 27.2; 26.8; 26.6
- Current Expenditure (percent of GDP): 23.4; 22.8; 23.4; 22.5; 22.5; 22.6; 21.1; 22.0; 18.9; 21.6; 21.2; 20.6
- Capital Expenditure (percent of GDP): 7.1; 6.2; 6.8; 5.5; 4.2; 5.9; 2.2; 6.2; 6.7; 4.8; 5.0; 5.5
- Cash Balance (percent of GDP): -7.6; -6.1; -5.9; -5.0; -4.1; -5.1; -3.6; -5.8; -6.2; -4.5; -4.0; -3.7
- Cash Balance (excluding grants, percent of GDP): -8.2; -6.7; -6.6; -5.6; -4.5; -6.0; -3.7; -6.5; -7.2; -5.0; -4.5; -4.3

### Government revenue and expenditure levels (selected monetary values)
- GDP (in billions of leks): 610.4; 677.7; 718.6; 744.6; 746.3; 821.6; 209.2? (quarter); 836.9; 229.9; 919.7; 1,007.0; 1,101.0
- Total Revenue and Grants (in percent of GDP and levels shown elsewhere): see above.
- Selected expenditure components (percent of GDP):  
  - Personnel cost: 6.8; 6.2; 6.4; 6.1; 6.0; 6.2; 5.2; 6.1; 5.2; 5.9; 5.9; 5.9  
  - Interest (percent of GDP): 4.2; 3.7; 3.8; 4.1; 4.1; 3.8; 3.6; 3.7; 3.3; 3.4; 3.1; 2.9

### Priority expenditure and social spending (selected levels)
- Education (millions of Lek): 11,197 (1997); 13,612 (1998); 16,850 (1999); 17,192 (2000); 19,488 (2001); 19,034 (2002); 21,268 (2003); 28,721 (2004)
- Health (millions of Lek): 6,269; 7,985; 12,066; 12,334; 12,027; 13,719; 15,699; 20,907
- Social security and welfare (millions of Lek): 26,611; 32,118; 35,397; 39,955; 44,893; 45,277; 53,608; 59,538
- Priority expenditure (percent of GDP, total): 13.8; 13.2; 15.3; 14.2; 14.1; 12.8; 13.0; 13.8

### External and public debt indicators (selected)
- Public and publicly guaranteed debt (percent of GDP): 64.4; 60.6; 64.9; 59.3; 56.8; 58.4; ...; 54.6; ...; 54.0; 53.3; 52.8
- External public and publicly guaranteed debt stock by creditors (selected totals, millions of U.S. dollars): total public and publicly guaranteed debt sector debt: 87.0; 77.8; 75.1; 74.2; 66.4; 62.3; 58.0; 55.8 (1997–2004 sequence header)
- Total external debt (in US$ millions): 876.6; 1,006.7; 1,108.3; 1,172.6; 1,198.4; 1,178.3; 1,408.7; 1,577.7 (1997–2004 series)
- Total external debt (percent of GDP): 40.8; 34.5; 31.6; 31.8; 26.8; 23.3; 20.1; 16.6 (1997–2004 series)
- External debt service (percent of exports, selected): 4.0; 4.1; 6.4; 4.7; ...; 6.2; 5.8; ...; 7.4; 7.9; 8.0; 7.8 (table entries by year)

### Indicators of external and financial vulnerability (selected)
- Current account (excluding official transfers, percent of GDP): -12.2; -7.1; -7.9; -7.4; -6.2; -9.0; -7.6; -7.5
- Current account (including official transfers, percent of GDP): -8.7; -3.9; -3.9; -4.4; -3.2; -6.5; -5.1; -5.5
- Gross official reserves (US$ millions): 306; 384; 485; 608; 737; 860; 908; 1,026; 1,133
- Official reserves in months of imports (goods and services): 3.8; 3.7; 3.8; 4.1; 4.3; 4.0; 4.0; 4.0

*Source: IMF staff report and accompanying tables as provided in the content unit.*

### 1. Principal

### 1. Principal

### Projected Payments to the Fund (Selected figures and projections)
- PRGF Repayments (annual sequence as presented): 4.8, 6.2, 7.6, 9.4, 9.6, 9.1, 6.7, 4.6, 2.8, 2.0, 0.4, 0.0, 63.3
- PRGF Interest (annual sequence as presented): 0.3, 0.3, 0.2, 0.2, 0.2, 0.1, 0.1, 0.0, 0.0, 0.0, 0.0, 0.0, 1.4
- SDR Net Charges (annual sequence as presented): 0.00 for all years shown
- Total Obligations (annual sequence as presented): 5.2, 6.4, 7.8, 9.6, 9.8, 9.2, 6.8, 4.6, 2.8, 2.0, 0.4, 0.0, 64.7
- Total Obligations (percent of quota sequence as presented): 11, 13, 16, 20, 20, 19, 14, 10, 6, 4, 1, 0, 33

### Alternate projection segment (selected figures)
- PRGF Repayments (alternate sequence): 0.00, 0.00, 0.00, 0.00, 0.00, 0.0, 1.2, 2.4, 2.4, 2.4, 2.4, 1.2, 12.0
- PRGF Interest (alternate sequence): 0.00, 0.00, 0.00, 0.10, 0.10, 0.10, 0.10, 0.10, 0.00, 0.00, 0.00, 0.00, 0.5
- Total Obligations (alternate sequence): 0.00, 0.00, 0.10, 0.10, 0.10, 0.11, 3.2, 2.5, 2.4, 2.4, 2.4, 1.2, 12.5
- Total Obligations (percent of quota sequence as presented): 0 0 0 0 0 0 0 3 5 5 5 2 26

### Cumulative projection segment (selected figures)
- PRGF Repayments (cumulative sequence): 4.8, 6.2, 7.6, 9.4, 9.6, 9.1, 7.9, 7.0, 5.2, 4.4, 2.8, 1.2, 75.3
- PRGF Interest (cumulative sequence): 0.3, 0.3, 0.3, 0.3, 0.2, 0.2, 0.1, 0.1, 0.1, 0.0, 0.0, 0.0, 1.9
- SDR Net Charges (cumulative): 0.00 for all years shown
- Total Obligations (cumulative sequence): 5.2, 6.5, 7.9, 9.8, 9.8, 9.2, 8.1, 7.1, 5.3, 4.4, 2.8, 1.2, 77.2
- Total Obligations (percent of quota sequence as presented): 11, 13, 16, 20, 20, 19, 17, 15, 11, 9, 6, 2, 58

### Outstanding Fund credit (end-of-year values as presented)
- Sequence: 62.4, 64.3, 56.7, 47.3, 37.6, 28.5, 20.6, 13.6, 8.4, 4.0, 1.2, 0.0

(Note: Projections are described as based on current interest rates for PRGF and the current SDR interest rate is assumed for net use of SDRs. Projections and figures are as presented in the source.)

### Cumulative obligations and obligations breakdown
- Cumulative obligations include existing and prospective drawings.
- Obligations are separated into obligations from existing drawings and obligations from prospective drawings as shown in the source table.

### Schedule of Purchases Under PRGF Arrangement (Table 12)
- Albania's quota: SDR 48.7 million.
- Dates, amounts, and conditions:
  - June 2002 — 4.0 SDR — 8.2 percent of quota — Board approval of PRGF arrangement
  - January 2003 — 4.0 SDR — 8.2 percent of quota — Observance of end-September 2002 performance criteria and completion of first review
  - July 2003 — 4.0 SDR — 8.2 percent of quota — Observance of end-March 2003 performance criteria and completion of second review
  - January 2004 — 4.0 SDR — 8.2 percent of quota — Observance of end-September 2003 performance criteria and completion of third review
  - July 2004 — 4.0 SDR — 8.2 percent of quota — Observance of end-March 2004 performance criteria and completion of fourth review
  - January 2005 — 4.0 SDR — 8.2 percent of quota — Observance of end-September 2004 performance criteria and completion of fifth review
  - Prior to June 20, 2005 — 4.0 SDR — 8.2 percent of quota — Observance of end-March 2005 performance criteria and completion of sixth review 2/
- Total under arrangement: 28.0 SDR — 57.4 percent of quota
- Note: The final disbursement under the PRGF arrangement must be carried out before expiration of the arrangement on June 20, 2005.

### Albania: Fund Relations (As of April 30, 2004)

### Membership and status
- Membership Status: Joined: 10/15/1991; Article XIV

### General Resources Account (SDR Million)
- Quota: 48.70 — 100.00 percent
- Fund Holdings of Currency: 45.35 — 93.12 percent
- Reserve position in Fund: 3.35 — 6.89 percent

### SDR Department
- Holdings: 63.67 (percent: N/A; Allocation shown as Holdings 63.67)

### Outstanding Purchases and Loans (SDR Million; Percent of Quota)
- ESAF/PRGF arrangements: 63.28 — 129.93 percent of quota

### Financial Arrangements (Approval Date, Expiration Date, Amount Approved (SDR Million), Amount Drawn (SDR Million))
- PRGF: Approval Date 06/21/2002; Expiration Date 06/20/2005; Amount Approved 28.00; Amount Drawn 16.00
- ESAF/PRGF: Approval Date 05/13/1998; Expiration Date 07/31/2001; Amount Approved 45.04; Amount Drawn 45.04
- ESAF: Approval Date 07/14/1993; Expiration Date 07/13/1996; Amount Approved 42.36; Amount Drawn 31.06

### Projected Obligations to Fund (SDR Million; based on existing use of resources and present holdings of SDRs)
- Forthcoming (annual columns shown as 2004, 2005, 2006, 2007, 2008)
  - Principal: 4.84 (2004), 6.17 (2005), 7.60 (2006), 9.41 (2007), 9.62 (2008)
  - Charges/Interest: 0.31 (2004), 0.28 (2005), 0.24 (2006), 0.20 (2007), 0.15 (2008)
  - Total: 5.15 (2004), 6.45 (2005), 7.84 (2006), 9.61 (2007), 9.77 (2008)

### Safeguards Assessments
- The Bank of Albania (BoA) is subject to a full safeguards assessment with respect to the PRGF arrangement, finalized in July 2002.
- The assessment took into account prior safeguards work, including an assessment report issued in May 2001 and a monitoring mission in March 2002.
- Findings:
  - The bank has made significant progress in implementing recommendations of the first safeguards assessment.
  - In general, the bank has adequate safeguards in place to reduce the risk of misuse and misreporting of Fund resources.
  - Minor weaknesses were noted in internal auditing, financial reporting, and internal control systems.
  - BoA management agreed to address the noted minor weaknesses.

### Exchange Rate Arrangement
- On July 1, 1992, Albania adopted a floating exchange rate system (an independent float).
- Under the Fund’s de facto exchange rate regime classification, Albania follows an independently floating exchange rate regime, although authorities occasionally intervene to smooth temporary fluctuations.
- Albania’s exchange rate arrangement is free from exchange restrictions and multiple currency practices subject to Fund jurisdiction under Article VIII.
- The country avails itself of transitional arrangements under Article XIV and maintains exchange restrictions in the form of outstanding debit balances on inoperative bilateral payment agreements that predate membership.
- Albania has not imposed new restrictions under Article VIII.
- The unified exchange rate stood at 106.1 lek per U.S. dollar on March 17, 2004.

### Article IV Consultation
- The conclusion of the 2002 Article IV consultation and the first review under the three-year PRGF arrangement took place in February 2003 (IMF Country Report No. 03/63).
- Albania has moved from a 12-month cycle to a 24-month cycle, in line with the decision on consultation cycles approved on July 15, 2002.

### FSAP Participation and ROSCs
- An FSAP is being planned, but no date has been set.
- A ROSC on data dissemination was published on the Fund’s website in May 2000.
- A fiscal ROSC was completed in June.

*Source: _cr04206 - 1. Principal (As of April, 2004).*

### 2003. Albania participates in the General Data Dissemination System (GDDS), and a

### _cr04206 - 2003. Albania participates in the General Data Dissemination System (GDDS), and a

### Data dissemination and statistical progress
- Albania participates in the General Data Dissemination System (GDDS); a complete set of GDDS metadata for the external, financial, fiscal, and real sectors, as well as for the socio-demographic indicators, is posted and regularly updated on the Fund’s Dissemination Standards Bulletin Board (http://dsbb.imf.org).
- Albania was selected as a pilot country for the preparation of the data dissemination module of the Report on the Observance of Standards and Codes (ROSC); the ROSC (data module) was published in May 2000.
- CPI and PPI developments:
  - A revision of CPI weights was initiated by INSTAT based on a new household budget survey; a revised CPI was finalized in February 2002.
  - The official monthly PPI has been published on a quarterly frequency since March 2002.
- National accounts:
  - INSTAT published the first official GDP estimates for 1996-2000 in January 2003 after STA technical assistance (resident advisor in 1999 and follow-up missions in 2001 and 2002).
  - Weaknesses remain in basic data sources and incomplete coverage of the private sector.
  - STA formulated a technical assistance project funded from the Italian sub account with the IMF: $500,000 committed over two years; Agreement/Purchase No. 4905 signed on November 15, 2003. A draft interim report was submitted; a revised interim report (incorporating STA comments) was expected before the end of March 2004.
- Trade and customs data:
  - Compilation and dissemination of foreign trade data resumed after disruptions (1997 crisis and Kosovo crisis).
  - Plans include introduction of the Automated System of Customs Data (ASYCUDA) with EU assistance.
  - ASYCUDA implementation: the program was not implemented in the Durrës customs house by end-March 2004 (a performance criterion), but ASYCUDA was implemented in the Durrës customs house in June 2004 as a prior action for the fourth review.
- Monetary, balance of payments, and external debt statistics:
  - Monetary statistics framework conforms to the Monetary and Financial Statistics Manual; commercial banks began reporting revised balance sheet data to the BoA in June 1999.
  - BoA compiles balance of payments using BPM5 classification; quarterly data are reported to STA regularly.
  - External debt database at the Ministry of Finance, developed with UNCTAD assistance, became fully operational in mid-2000; coverage and recording of old arrears need improvement.

### IMF presence, technical assistance, and program context
- IMF technical assistance:
  - The Fund has sent several technical assistance missions to Albania every year since 1991.
  - Further institutional development is required in virtually every sector.
- Resident representative:
  - A Fund resident representative has been posted in Tirana since April 1993; Mr. Jan-Peter Olters has held this position since March 2002.
- PRGF-supported program and conditionality:
  - IMF leads in assisting Albania to maintain macroeconomic stability and financial sustainability through quantitative targets within the PRGF-supported program (program in 2002 with subsequent reviews in February 2003, July 2003, and January 2004).
  - Structural conditionality focuses on fiscal management and control; payments discipline; governance; and privatization.
  - The PRGF-supported program complements Bank activities by focusing on fiscal management and control, payment discipline, and mobilizing adequate resources for NSSED priorities; it includes strengthening tax and customs revenues, improving budget control of foreign-financed projects and state-owned enterprises, and actions to regularize inter-enterprise and external arrears.

### World Bank engagement and priorities
- National Strategy for Socio-Economic Development (NSSED):
  - NSSED presented June 2002 and updated May 2003 and June 2004; two pillars: strengthening governance and achieving high economic growth; priorities: education, healthcare, infrastructure; increased emphasis on poverty reduction.
- Bank strategy priorities (aligned with NSSED):
  - Improve governance and strengthen institutions (transparency, accountability, contestability of policy formulation, monitoring and evaluation).
  - Promote sustainable private sector growth (environment for private development, financial sector reforms, agricultural growth, infrastructure, environmentally sustainable natural resource use).
  - Foster human development (access/quality of education and healthcare, sustainability/equity of social insurance, improve targeting and efficacy of social assistance and community social services).
- Bank operations and program:
  - To date, the Bank approved a total of 53 operations amounting to US$743 million.
  - In FY03-05 Country Assistance Strategy: initiated Poverty Reduction Support Credit (PRSC) program; planning a total of 10 possible investment operations in education, health, power, transport, environment, municipal water, and community works; five of these operations approved to date.
  - PRSCs: PRSC-1 presented to the Board in June 2002; PRSC-2 in July 2003; preparations for PRSC-3 are well advanced.
  - PRSC focus areas: promoting sustainable growth and private sector development; strengthening capacity to monitor/evaluate the policy agenda; improving service delivery and social safety net effectiveness; improving core public functions and institutional arrangements.

### Bank–Fund collaboration: sectoral reforms and actions
- Financial sector reforms:
  - Post-1997 reforms aimed at divesting the State from banking and insurance, establishing sound governance in financial institutions, and reviving banking sector reforms.
  - Financial Sector Adjustment Credit approved June 2002 supported measures including privatization of the Savings Bank, development of deposit insurance, improvement of bankruptcy framework and collateral enforcement, and strengthening bank regulation and supervision (also aids anti-money-laundering efforts).
  - IMF provided technical assistance to the Bank of Albania and funded a resident adviser to support implementation of the institutional development program for banking supervision.
  - Savings Bank privatization: successful privatization occurred in January 2004.
- Power sector:
  - Since mid-2000 Albania experienced severe electricity shortages due to excessive demand (illegal use and nonpayment), dry hydrological cycle affecting hydropower, and transmission constraints.
  - Government and World Bank developed a two-year energy sector action plan at end-2000; action plan updated annually; Government adopted a Policy Statement for power sector reform.
  - Power Sector Rehabilitation and Restructuring Project approved June 2002 includes conditionality on sector performance, restructuring, and regulatory/legislative strengthening.
  - A new thermal generation investment project was approved by the Bank’s Board in March 2004.
  - Fund-supported conditionality in the PRGF program focuses on budgetary implications and elimination of subsidies for electricity imports by end of the program period.
- Social sectors and pension reform:
  - Pension system deficit currently amounts to about one percent of GDP; projections suggest worsening absent reform.
  - Problems: low compliance, high social insurance contribution rates discouraging participation, but pensions important for rural poverty alleviation and elderly safety net.
  - Reforms under PRSC included:
    - (i) increasing the retirement age for men and women;
    - (ii) reducing the contribution rates for employees’ pensions and other social insurance benefits;
    - (iii) changing the base for assessing contributions to increase collections for employees’ pensions;
    - (iv) improving performance in collecting pension contributions;
    - (v) narrowing the gap in pension levels for self-employed rural and urban workers and increasing their levels in real terms;
    - (vi) raising contribution rates for self-employed rural workers.
  - Bank and Fund fully support the approach; conditionality incorporated within Bank-supported PRSC program.
- Public expenditure management:
  - Key challenges: (i) create and sustain transparent budget decision-making; (ii) improve usefulness, quality, and timeliness of budget information; (iii) enhance budget execution transparency and accountability, including audit mechanisms.
  - Government uses Medium-Term Budget Program (MTBP) as centerpiece of budget formulation; linked NSSED preparation with MTBP under PRSC.
  - PRSC commitments include preparing an action plan to strengthen budget systems/procedures and monitoring of budget outputs; training budget staff in line ministries; procedures for recording disbursement and expenditures on all externally-financed projects; improving financial reporting and audit functions.

### Debt sustainability analysis — findings and projections
- Recent trends and context:
  - Albania’s total external debt declined from 32.6 percent of GDP in 1995 to 20.2 percent of GDP at end-2003, owing primarily to significant debt relief and rapid growth.
  - Non-debt creating inflows—remittances, FDI, and official transfers—have financed a large part of the trade deficit.
- Key indicators (2003):
  - External debt NPV: 17.5 percent of GDP in 2003.
  - Debt-service-to-exports ratio: about 5 percent in 2003.
- Debt sustainability assessment:
  - Debt position appears sustainable over the medium term given 2003 NPV and benign stress test results under most scenarios.
  - Stress tests highlight risk from higher-than-programmed current account deficits; need to raise export capacity and diversify the export base as vulnerability will increase with growing non-concessional financing.
- Fiscal/public debt:
  - Fiscal debt (government and government-guaranteed) declined from 85 percent of GDP in 1997 to 57 percent of GDP in 2003.
  - Under the baseline scenario fiscal debt will decline to 53 percent of GDP in 2007.
  - About ⅔ of fiscal debt is domestic and denominated in lek.
  - Under most stress test scenarios fiscal debt remains declining or broadly stable; however, a shock to the primary balance could increase general government debt significantly.
  - Fiscal debt would not be sustainable under a two-standard-deviation shock to growth sustained over two years—reflecting a large historical standard deviation of output growth (7 percentage points of GDP) and the public finances’ primary deficit position (requiring growth to exceed interest rate for sustainability).
- Selected historical and projected series (excerpted from staff simulations and tables):
  - External debt (nominal) as percent of GDP:
    - 1995: 32.6
    - 1996: 28.1
    - 1997: 40.8
    - 1998: 34.5
    - 1999: 31.6
    - 2000: 31.8
    - 2001: 26.8
    - 2002: 23.3
    - 2003: 20.2
    - 2004: 21.0
  - Identified net debt-creating flows (selected years):
    - 1995: -11.5
    - 1997: 17.3
    - 2001: -5.8
    - 2003: -0.2
  - Non-interest current account deficit (percent of GDP):
    - 1995: 6.9
    - 1997: 11.6
    - 2001: 5.8
    - 2003: 7.3
  - Deficit in balance of goods and services (percent of GDP):
    - 1995: 22.0
    - 1997: 21.0
    - 2001: 22.4
    - 2003: 23.1
  - Exports (percent of GDP):
    - 1995: 12.5
    - 2003: 19.0
  - Imports (percent of GDP):
    - 1995: 34.5
    - 2003: 42.1
  - Net current transfers (negative = inflow) (percent of GDP):
    - 1995: -12.4
    - 2003: -12.7
  - Net FDI (negative = inflow) (percent of GDP):
    - 1995: -3.7
    - 2003: -2.9
  - NPV of external debt (selected projections):
    - 2003: 17.5
    - 2004: 17.7
    - 2005: 17.6
    - 2010: 17.2
    - 2015: 14.7
    - 2018: 12.5
    - 2023: 8.7
  - NPV of PPG external debt (selected projections):
    - 2003: 17.4
    - 2004: 16.8
    - 2005: 16.7
    - 2010: 16.7
    - 2015: 14.3
    - 2018: 12.2
    - 2023: 8.4
  - Debt service-to-exports ratio (percent) (selected years):
    - 1995: 3.2
    - 1998: 9.1
    - 2002: 6.8
    - 2003: 5.0
    - 2010: 9.4
    - 2018: 8.0
  - Nominal GDP (billions of US dollars) (selected years):
    - 1995: 2.4
    - 2000: 3.7
    - 2003: 6.1
    - 2008: 11.1
    - 2015: 24.7
    - 2023: 36.3
- Sensitivity and stress-test results (high-level summary):
  - Baseline NPV of debt-to-GDP ratio remains around 17 percent in short term and declines over long term (to 8 percent by 2023).
  - Alternative scenarios and bound tests show vulnerabilities under combinations of adverse shocks (e.g., historical-average shocks, lower growth, lower export growth, large depreciation), with NPV-to-exports and debt-service ratios rising substantially under some scenarios.
  - Debt-stabilizing primary balance and public sector debt dynamics presented in staff projections (Table 3) indicate the need for continued fiscal consolidation and growth-enhancing policies.

### Policy implications and recommendations (as reflected in the text)
- Maintain macroeconomic stability and financial sustainability through PRGF-supported program targets and structural conditionality.
- Continue and deepen financial sector reforms: privatization, deposit insurance, bankruptcy and collateral enforcement, stronger regulation and supervision, and anti-money-laundering measures; sustain IMF technical assistance and resident adviser support.
- Implement power sector reforms to eliminate subsidies for electricity imports, reduce nonpayment and illegal use, improve KESH finances, and increase domestic generation and transmission capacity; coordinate donor actions and implement conditionality under Bank and Fund programs.
- Pursue comprehensive pension reforms to reduce reliance on budgetary transfers, improve coverage, affordability, equity, and adequacy; implement PRSC parametric reforms (retirement age, contribution bases and rates, collection performance).
- Strengthen public expenditure management via MTBP, action plans to strengthen budget systems and monitoring, training for budget staff, and improved reporting and audit mechanisms.
- Improve statistical systems: enhance national accounts compilation, expand coverage of monetary statistics (include SCAs), strengthen balance of payments measurement (services, remittances, financial account), introduce ASYCUDA and improve trade statistics, and ensure timely reporting of fiscal and external debt data.

*Prepared by World Bank staff; source content as in the IMF/World Bank material provided.*

### 1.      This memorandum reviews the implementation of the PRGF-supported

### _cr04206 - 1.      This memorandum reviews the implementation of the PRGF-supported

### Performance under the program
- Post-1997-1998 crisis achievements:
  - Output growth averaged 7 percent since 1999.
  - Inflation is within the 2-4 percent target range of the Bank of Albania (BoA).
  - Private investment increased as a proportion of GDP (level described as "still low relative to our growth needs").
  - Current account deficit narrowed since 2002 supported by a rapid increase in exports.
  - Reserve cover rose substantially each year; lek appreciated steadily.
- Fiscal consolidation and public debt:
  - Overall fiscal deficit is now about 5 percentage points of GDP lower than in 1999.
  - Tax revenue-to-GDP ratio increased by 2 percentage points of GDP in 1999-2003.
  - Public debt-to-GDP ratio reduced from 76 percent at end-1998 to an expected 55 percent at end-2004.
- Tax and customs administration reforms:
  - Implementation of ASYCUDA within the Tirana and Durrës custom houses.
  - Extension of civil servant status or equivalent to staff of the GDT and GDC; hiring of additional qualified employees.
  - Greater public dissemination of internal tax procedures and regulations; strengthened appeal process and publication of appeals proceedings.
  - Taxpayer identification numbers assigned to all businesses; delays in completing process for individuals.
  - First phase of transfer of social security contributions collection to the GDT (large and VAT taxpayers) implemented; subsequent steps under way.
- Public sector arrears and VAT refunds:
  - Memorandums of understanding rescheduling or clearing all arrears incurred up to December 2001 between public enterprises and government agencies signed.
  - Provision for full payment of these obligations and of arrears incurred after 2001 appropriated in the budget on a current basis.
  - Plan adopted to regularize repayment of outstanding stock of VAT refund arrears over 2004-05.
- Budget process and financial sector modernization:
  - Reforms to enhance transparency, parliamentary oversight, and better targeting of expenditure.
  - Improvements in accounting standards, supervisory capacity, and enabling legislation (including insurance).
  - Sale of Savings Bank places entire banking system under private management.
  - Completion of AIPS (real-time gross settlement), establishment of intraday collateralized credit facility, forthcoming bulk settlement system.
  - Development of legal/technical framework to combat money laundering and terrorism financing; FSAP requested.
- External sector and investment climate:
  - Regularized half of external arrears; expect to finalize agreement on remainder within program period.
  - Concluded regional free trade agreements; negotiating Stabilization and Association Agreement with the EU.
  - Measures to reduce administrative barriers to investment (FIAS Action Plan), implement Law on Asset Declaration, improve anti–money-laundering system, enforce conflict of interest legislation.

### Policies and measures for July 2004–June 2005 — Overall strategy
- Core strategy unchanged entering final year of PRGF arrangement:
  - Monetary and fiscal policies to promote macroeconomic stability and growth.
  - Pursue institution-strengthening, governance-enhancing policies, and intensify anti-corruption efforts.
  - Expect growth to become more export driven and increasingly sustained by foreign and domestic investment as aid declines in volume and concessionality.
  - Commitment to reducing poverty, improving resource mobilization/use, and essential services (health care, education, social protection).
  - Deepen policy dialogue with all stakeholders.

### Macroeconomic outlook (2004–07)
- Growth and inflation:
  - Growth forecast to stay close to trend of 6 percent during 2004–07.
  - Inflation expected to remain within 2-4 percent target band.
- External trade volumes:
  - Volume growth of merchandise goods exports expected at about 17 percent in 2004.
  - Import volume growth expected close to 14 percent in 2004.
- Medium-term structural expectations:
  - Growth increasingly driven by rising foreign and domestic export-generating investment.
  - Reforms in tax administration and reduction in informal economy to increase tax revenue as share of GDP enabling expansion of priority expenditure alongside fiscal consolidation.
  - Public and private consumption expected to decline as share of GDP.
  - Gradual reduction in reliance on foreign savings with rising share of foreign trade in GDP.

### Fiscal policy (adjustments for 2004 and medium term)
- 2004 adjustments and targets:
  - Need for adjustment measures of 0.7 percent of GDP for 2004 due to revenue shortfall (more than the ¼ percent of GDP reserve) and external disbursements under-realized by 0.1 percent of GDP.
  - Adjustment to take mainly the form of expenditure reductions in short term; revenue-enhancing measures introduced and additional tax legislation planned with full impact in 2005.
- Use of privatization proceeds:
  - Proceeds from sale of Savings Bank equal to 1.6 percent of GDP.
  - Half of these proceeds to retire domestic debt; half to be spent on well-designed capital projects in priority areas consistent with NSSED.
- Specific expenditure measures (2004):
  - Reduce expenditure in 2004 by about 0.6 percent of GDP.
  - Do not release Lek 1 billion of spending from the Reserve Fund (as agreed during the third program review).
  - Reduce expenditure by about Lek 3.6 billion from administrative and non-priority operations and maintenance, other current spending, and selected capital projects in non-priority areas.
  - Maintain a Contingency Fund of Lek 2 billion; release contingent on meeting conditions (cumulative revenue excluding project grants not less than Lek 134 billion; net credit to government quantitative performance target met; prospects consistent with fiscal program).
- Revenue measures (2004):
  - Introduce revenue-enhancing tax-policy measures equivalent to about 0.1 percent of GDP already in 2004.
  - Increased rural social security contributions; raised minimum quality grade of imported diesel (higher indirect tax collection and environmental benefits).
  - Plan to increase excise rates on cigarettes before the summer parliamentary recess generating 0.1 percent of GDP on an annual basis.
  - Increased casino registration fees.
  - Considering including customs duties in the base for excise duties on diesel in the 2005 budget, conditional on international energy prices.
- Resulting 2004 fiscal outcome:
  - Expected overall deficit in 2004 of 5.8 percent of GDP.
  - Domestic borrowing set at 1.9 percent of GDP—equivalent to original budget value adjusted for saving of half the privatization receipts.
- Monetary framework and central bank support measures:
  - Issue treasury bills to the BoA to cover accumulated net reserve valuation losses (stemming from appreciation of the lek) as reflected in final balance sheet as of end-2003—currently estimated at Lek 6.4 billion.
  - Reduce maximum permissible level of direct lending from the BoA to the government—now set at 5 percent of the previous year’s budget revenue—by at least ½ percent each year.
- Medium-term fiscal strategy (2005–07):
  - 2005 net domestic credit to government set at 2½ percent of GDP—a decline of ¼ percentage point of GDP with respect to the underlying 2004 level computed before privatization savings.
  - Tax measures to include price indexation of specific excises and fees and structural measures recommended by FAD to harmonize VAT, profit tax, personal income tax, and social insurance contributions with international best practices.
  - Complete transfer of social security collection to GDT; reform employee compensation schemes in GDT and GDC to reinforce performance-based incentives.
  - Public debt projected to decline from 55 percent of GDP in 2004 to 53 percent of GDP by 2007 (before additional decline from planned but unbudgeted large privatizations).
  - Overall deficit projected to fall to 4½ percent of GDP in 2005, and further to 3¾ percent of GDP by 2007 (based on conservative estimates of concessional foreign financing).
  - Continued reforms to expand tax net, improve expenditure efficiency, and raise public servants’ skill and professionalism.

### Budget transparency, parliamentary control, and procurement
- Technical assistance from U.K. DFID to improve budget process.
- As agreed at third review:
  - Lower maximum allowable transfer between appropriations in 2005 budget to 5 percent.
  - Introduce greater detail into appropriations of 2005 fiscal package, particularly on current expenditure.
  - Seek greater prioritization of capital spending.
  - Improve compliance with procurement procedures; ensure budgetary institutions develop and comply with internal rules to limit administrative and non-priority spending.
  - Establish more detailed and timely reporting of fiscal developments to Parliament and public.

### Monetary and financial sector policies
- Monetary policy stance:
  - Aim to keep inflation within 2–4 percent target band and maintain adequate reserves.
  - Repo rate, supported by open market operations, remains main policy instrument.
  - Expect money demand to remain broadly stable as share of GDP; private sector credit to grow rapidly from current low base; share of currency in broad money to continue to decline.
  - Aim to maintain foreign reserve coverage equivalent to at least four months of imports; 2004 reserve increase to reflect privatization receipts.
  - Maintain flexible exchange rate with intervention mainly for smoothing short-term shocks unrelated to fundamentals.
- BoA structural reforms and payments system:
  - June 2004 action plan to increase use of banking system in regular conduct of business.
  - Prior action for fourth review: BoA began paying salaries of all its professional staff through banking system as pilot to be extended to all BoA employees and further 3,500 public employees by end-September 2004 (PC).
  - By end-2004, at least 10,000 public employees will be paid through banking system (PC; end-December 2004).
  - Consider increasing target for fifth review based on experience.
  - Develop and operationalize a bulk clearing system in collaboration with World Bank, aiming at full operation in first half of 2005.
  - Support AIPS and ensure functioning of Intraday Collateralized Credit Facility.
  - Initiate legal reforms for evidential value of electronic signatures; prepare draft legislation with IMF and World Bank.
  - Prepare draft legislation updating the Banking and the Accounting Laws with IMF and World Bank assistance.
- Supervision, technical assistance, and safeguards:
  - BoA to develop action plan for implementing MFD technical assistance recommendations in banking supervision, stress testing, inflation targeting, and accounting.
  - Actions to be consistent with completion of World Bank–supported Supervisory Development Project.
  - Strengthen analytical capacity in BoA in preparation for eventual adoption of inflation targeting.
  - Full cooperation with IMF safeguards policy; provide updated documents and data as necessary; avail of technical assistance from MFD resident advisor.

### Structural policy and governance
- Governance and institution-building prioritized to develop rules-based business climate and attract investment; further progress needed in civil service and judiciary reform, and fighting crime and corruption.
- Administrative barrier reduction:
  - Implementation of Action Plan with FIAS is on track (SB; ongoing).
  - By end-December 2004, complete first comprehensive self-assessment of reform process and prepare updated measures.
  - Initiated second round of Administrative and Regulatory Cost Survey.
  - Focus on removing remaining industrial licenses, streamlining inspections, improving appeals system, and developing outcome-based indicators.
- Privatization plans:
  - Prepare Albtelekom for prompt privatization.
  - Full divestment of interest in INSIG, two oil-sector companies, and remaining minority positions in two commercial banks over next 18 months.
  - Use half the proceeds of sale of Albtelekom, remaining stake in INSIG, and other future large privatizations to retire public debt; remainder to finance priority investments.
- Public sector professionalism and pay reform:
  - Improve quality and professionalism of public sector; relate pay and bonuses more closely to productivity and performance.
  - Implement Instruction No. 2 of Law No. 8549 assigning specialists to higher wage categories in time for inclusion in 2005 fiscal package.
  - Discussions with IMF staff on whether policy of indexing wages to changes in CPI contradicts pay-for-performance aim; full review to be undertaken at time of fifth review.

*Source: Memorandum reviewing implementation of the PRGF-supported program and policies for June 2004–March 2005.*

### 16.      We have taken steps to improve the coordination of donor assistance through the

### _cr04206 - 16.      We have taken steps to improve the coordination of donor assistance through the

### Donor coordination and institutional arrangements
- Creation of a secretariat under Office of the Prime Minister to monitor and coordinate relations with donors in four main categories of assistance, mirroring counterpart structures led by the EU, World Bank, OSCE, and UNDP.
- Consideration of introducing a law to formalize the preparation, prioritization, execution, and evaluation of foreign-financed investments and to create institutions to improve coordination with the donor community.

### Utilities sector reform and social mitigation
- Actions to rationalize the utilities sector will continue in consultation with the World Bank.
- To cushion social impact of tariff increases, plan to implement a subsidy to low income electricity consumers as of September 2004 (structural benchmark).

### Property recognition, restitution, and compensation
- Progress constrained by sustainability of public finances.
- Selected form of compensation will be transparent and rules-based.
- Forms of compensation will exclude any tax credit or exemption and give priority to issuing equity in state-owned property, rather than generating budgetary obligations.

### External policy: trade and agreements
- Continued commitment to a liberal trade regime and pursuit of a Stabilization and Association Agreement with the EU and achieving an Albania-EU free trade area.
- During 2003 and the first quarter of 2004, six new Free Trade Agreements were ratified by Parliament, including a free trade agreement with Kosovo; three of them await ratification by trade partners.

### External arrears restructuring
- Continuing to restructure outstanding stock of external arrears with aim to complete process with official creditors by end of program period.
- Agreements with Hungary and private creditors from FYR Macedonia were ratified by Parliament in March 2004.
- Substantial progress with the Czech Republic, the Slovak Republic, and Poland on rescheduling terms; hope to complete negotiations in 2004.

### Management of non-concessional foreign-financed investment projects
- Continue improving management and integration with NSSED and MTBP sectoral strategies.
- Aim to establish transparent, competitive procedures for negotiating and selecting supply and lending agreements pursuant to international practices and Albanian legislation.
- Large-scale projects subject to international open tenders and executed only if independent feasibility studies by international standards are prepared (structural benchmark; ongoing).
- Quarterly reporting to the IMF on list and status of projects considered for non-concessional financing (structural benchmark; ongoing).
- Quantitative performance criteria (PCs) for September 2004 and March 2005, and indicative targets for June and December 2004 set as ceilings on contracting or guaranteeing of public and publicly-guaranteed non-concessional borrowing.

### Data and statistical improvements
- Working to improve quality and coverage of economic statistics, addressing weaknesses that hamper monitoring and policymaking.
- Cooperating with technical assistance providers, including two major projects funded by the IMF (Italian subaccount) and the EU.
- Improving scope and collection of data on private remittances, real sector activity indicators and national accounts, with attention to assessment of informal activity.
- Will prepare a plan to accelerate regular preparation and improve timeliness of national accounts to be discussed during the fifth review.
- Will employ surveys and other tools to improve statistics on foreign direct investment through comprehensive coverage of at least the largest enterprises, and will ensure provision of adequate resources to INSTAT.

### Program monitoring, disbursements, and program conditionality
- Sixth disbursement under PRGF-supported program based on:
  - end-September 2004 quantitative PCs and end-December 2004 indicative targets (Table 1 and the TMU);
  - end–September and end-December 2004 structural conditionality (Table 2);
  - completion of the fifth review and the financing assurances review.
- Seventh disbursement based on:
  - end-March 2005 quantitative PCs;
  - completion of the sixth review and the financing assurances review.
- During program period, Albania will not:
  - impose or intensify restrictions on the making of payments and transfers for current international transactions;
  - introduce multiple currency practices;
  - conclude bilateral payments agreements inconsistent with Article VIII;
  - impose or intensify import restrictions for balance of payments reasons.
- Will provide a new progress report on the NSSED by April 2005, taking into account recommendations of the joint staff assessment of the 2004 progress report.

### Key quantitative targets and statistics (as presented)
- Ceiling on net domestic credit to the government (in billion lek): 6; 9; 9; 14; 16; 18; 20; 21; 21; 6; 6; 6; 12; 11; 16; 26.
- Ceiling on net domestic assets of the BOA (in billion lek): -18; 11; 11; -14; 2; 4; -19; 6; 6; -24; -7; -7; -5; 2; 7; 5.
- Indicative target for revenues collected by Tax Department (in billion lek): 26; 29; 29; 40; 43; 43; 57; 59.
- Indicative target for revenues collected by Customs Department (in billion lek): 27; 27; 27; 41; 43; 43; 54; 59.
- Indicative targets for Social Insurance Revenues (in billion lek): 14; 15; 15; 21; 22; 22; 29; 31.
- Indicative total tax revenue targets, millions of Lek 5/: 36; 36; 36; 76; 116; 161; 201.
- Floor for net international reserves of the BOA (in millions of US dollars): 44; 20; 17; 52; 14; -2; 112; 21; 18; 104; 57; 57; 71; 71; 83; 106.
- Ceiling on contracting or guaranteeing of public and publicly-guaranteed non-concessional external debt (in millions of US dollars): 21; 80; 80; 21; 100; 100; 20; 130; 130; 20; 150; 150; 170; 190; 220; 240.
- Ceiling on public and publicly-guaranteed external debt with original maturities up to and including 1 year: 0 (applies across listed dates).
- Nonaccumulation of new external payments arrears, excluding interest on pre-existing arrears: 0 (applies across listed dates).

### Selected structural benchmarks and performance criteria
- Prior actions for the Fourth Review (Completed):
  - Allocate proceeds from sale of the Savings Bank in accordance with attached MEFP.
  - Bank of Albania to pay salaries of all its professional staff through the banking system.
  - ASYCUDA computer administration system to be made operational in the Durrës port.
- Proposed performance criteria for the Fifth Review:
  - Salaries of 3,500 Government employees and of all employees of the Bank of Albania to be paid through the banking system — End-September 2004.
  - Salaries of at least 10,000 employees of budgetary institutions to be paid through the banking system — End-December 2004.
- Proposed structural benchmarks under the Fifth Review:
  - Strengthen tax and customs administration through:
    - (i) Improving the VAT refunds process by reporting on the stock of VAT refunds claimed and refunds paid out every month — Ongoing.
    - (ii) Redrafting instructions, decisions and laws on tax procedure, the income tax and the VAT to make them internally consistent as part of the 2005 fiscal package — End-October 2004.
  - Government to implement a subsidy to low income electricity consumers — End-September 2004.
  - Continue to implement action plan for removing administrative barriers to investment — Ongoing.
  - Prepare quarterly reports (within one month of the end of each quarter) on the stock of external arrears — Throughout.
  - Safeguard efficient use of nonconcessional foreign project loans through:
    - (i) Conducting an independent feasibility study for any large project financed through non-concessional borrowing — Throughout.
    - (ii) Provide a quarterly listing and status report on all projects being considered for nonconcessional foreign financing — Throughout.

*Source: _cr04206 - 16.      We have taken steps to improve the coordination of donor assistance through the*

### 11.      The NCG and NDA ceilings and the NIR floor are defined on the assumption that

### _cr04206 - 11.      The NCG and NDA ceilings and the NIR floor are defined on the assumption that

### Privatization proceeds assumptions and program adjusters
- Total privatization proceeds (privatization proceeds received in foreign currency) assumed cumulatively from January 1, 2004, to:
  - End-September 2004 Lek 16,673 million, (US$157.0 million);
  - End-December 2004  Lek 19,036 million, (US$167.0 million);
  - End-March 2005    Lek 19,833 million, (US$174.5 million).
- Adjustment rules:
  - The NIR floor will be adjusted upward (downward) and the NDA ceiling adjusted downward (upward) by half of any excess (shortfall) in the receipt of privatization proceeds in foreign currency from these assumed values.
  - The NCG ceiling will be adjusted downward (upward) by half the amount of any excess (shortfall) in the receipt of total privatization proceeds from these assumed values.
- Conversion note for NCG adjuster:
  - For the NCG adjuster, the lek equivalent of deviations from the programmed amounts in terms of dollars is converted at an exchange rate of Lek 106.5 per U.S. dollar.

### Foreign budgetary and balance of payments loan financing assumptions and adjusters
- Assumed cumulative foreign budgetary and/or balance of payments loan financing (excluding IMF financing, project and commodity loans, and macro-financial assistance from the EU) from January 1, 2004, to:
  - End-September 2004 US$19.0 million;
  - End-December 2004 US$19.0 million;
  - End-March 2005 US$29.0 million.
- Adjustment rule:
  - If total foreign loan financing exceeds this projection, the ceilings on NCG to the government and NDA of the Bank of Albania will be adjusted downward, and the floor on NIR will be adjusted upward by the amount of the excess.

### Other monetary adjustments
- The NDA ceilings will be adjusted to reflect the impact of any change in the required reserve ratio of commercial banks with the Bank of Albania.

### External debt, arrears, and definitions
- Definition of “debt” (Guidelines on Performance Criteria with Respect to Foreign Debt, Decision No. 12274–00/85, August 24, 2000):
  - A current (not contingent) liability created under a contractual arrangement through provision of value (assets or services) requiring future payments in assets or services to discharge principal and/or interest.
  - Primary forms: (i) loans (including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements); (ii) suppliers’ credits; (iii) leases (debt measured as present value at lease inception of lease payments excluding operation/repair/maintenance payments).
  - Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt.
  - Failure to make payment on an obligation not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.
- Limit on medium- and long-term external debt:
  - Applies to contracting or guaranteeing by the central government or the Bank of Albania of new nonconcessional external debt with original maturity > 1 year, with sub-limits for maturities > 1 year and ≤ 5 years.
  - Applies to debt as defined above and commitments contracted or guaranteed for which value has not been received.
  - External debt considered contracted when loan agreement or guarantee is ratified by the Albanian parliament.
  - Exclusions: refinancing credits and rescheduling operations (including deferral of interest on commercial debt), credits extended by the IMF, and credits on concessional terms defined as those with a grant element of at least 35 percent.
  - Grant element calculation: use OECD Commercial Interest Reference Rates (CIRRs): for maturities < 15 years use six-month averages of CIRRs; for maturities > 15 years use ten-year averages.
  - Debt within the limit valued in U.S. dollars at exchange rate prevailing when contract or guarantee becomes effective.
- Limit on short-term external debt:
  - Continuous basis on stock of short-term external debt owed or guaranteed by the central government or the Bank of Albania with original maturity ≤ 1 year.
  - Exclusions: rescheduling operations (including deferral of interest on commercial debt) and normal import-related credits.
  - Debt within the limit valued in U.S. dollars at exchange rate prevailing when contract or guarantee becomes effective.
- Continuous performance criterion:
  - Non-accumulation of new external payments arrears on external debt contracted or guaranteed by the central government or the Bank of Albania.
  - External payment arrears defined as external debt service obligations (principal and interest) falling due after March 31, 2002 and not paid when due as specified in contractual agreements.
  - Exclusions from prohibition on new arrears: (i) arrears arising from interest on the stock of arrears outstanding as of March 31, 2002; (ii) external arrears subject to debt rescheduling agreements or negotiations.
- Definition of “large projects”:
  - Projects financed by nonconcessional foreign borrowing involving total nonconcessional foreign borrowing in excess of US$25 million.

### Tax revenue monitoring
- Collection of total tax revenue by the Tax and Customs Departments and social insurance contributions will be monitored on the basis of quarterly indicative floors.
- Indicative floors include all revenues collected by the GDT, GDC, and SSI (including revenues collected on behalf of local governments), but exclude revenues collected by local governments directly.

### Monitoring and reporting requirements (monthly unless noted)
- Bank of Albania will supply to the Fund:
  - (i) The balance sheets of the Bank of Albania;
  - (ii) The consolidated accounts of the commercial banks and (separately) the SLIs;
  - (iii) The monetary survey;
  - (iv) Net domestic credit to the government (in the form outlined in Appendix Table 1);
  - (v) The net foreign assets of the Bank of Albania;
  - (vi) The foreign exchange cashflow of the Bank of Albania, including the level of NIR;
  - (vii) Daily average exchange rates;
  - (viii) Trade flows;
  - (ix) Periodic updates of balance of payments estimates.
- Ministry of Finance will supply to the Fund:
  - (i) The summary fiscal table, including the overall budget deficit, on a cash basis;
  - (ii) Issuance of treasury bills by the MOF, including gross value and cash received;
  - (iii) Privatization receipts;
  - (iv) Information on the contracting and guaranteeing of new debt;
  - (v) Information on the stock of short-, medium- and long-term debt;
  - (vi) Information on all overdue payments on short-, medium- and long-term debt (with assistance from the Bank of Albania);
  - (vii) Information on the stock of VAT refunds claimed and refunds paid out every month.
- General Directorate of Customs will supply:
  - (i) Detailed monthly data on customs revenues collected;
  - (ii) Quarterly reports on corrective measures taken to deal with problems identified by the internal audit function.
- General Directorate of Taxation will supply:
  - (i) Detailed monthly data on tax revenues collected.
- Ministry of Economy (quarterly report or publication):
  - (i) All instances of nonpayment on the agreed memorandums of understanding for the repayment of the stock of end-December 2001 inter-enterprise arrears.
  - (ii) A description of remedial actions undertaken by the ministry in the event of non-payment on the agreed MOUs for the repayment of the stock of end-December 2001 inter-enterprise arrears.

### Key figures from Table 1: Net Domestic Credit to Central Government (selected items, In millions of lek)
- Treasury bills held outside central government (Dec-03, Mar-04): 271,417 277,129
  - Held by Bank of Albania 1/ (Dec-03, Mar-04): 70,372 66,169
  - Held by deposit money banks 1/ (Dec-03, Mar-04): 184,203 192,425
  - Held by other domestic lenders (excluding holdings of HHI and SSI) 2/ (Dec-03, Mar-04): 16,842 18,534
    - INSIG (Dec-03, Mar-04): 1,548 1,488
    - Individuals and firms (Dec-03, Mar-04): 15,294 17,046
      - Of which: BoA window (Dec-03, Mar-04): 9,528 10,413
- Other central government debt held outside central government (millions of lek) (Dec-03, Mar-04): 6,449 6,774
  - Held by Bank of Albania 3/ (Dec-03, Mar-04): 1,449 964
  - Held by deposit money banks 4/ (Dec-03, Mar-04): 5,000 5,810
- Equals gross domestic credit to government (Dec-03, Mar-04): 277,866 283,903
- Assets of central government (excluding HHI and SSI) (Dec-03, Mar-04): 7,534 7,203
  - Deposits held at Bank of Albania (Dec-03, Mar-04): 4,914 4,503
    - In domestic currency (Dec-03, Mar-04): 3,295 2,886
      - Transferable deposits in lek (Dec-03, Mar-04): 2,902 2,494
      - Deposits in lek for projects (Dec-03, Mar-04): 393 393
    - In foreign currency at program exchange rates and program price of gold 7/ 8/ (Dec-03, Mar-04): 1,619 1,617
      - In foreign currency evaluated at current exchange rates (Dec-03, Mar-04): 1,619 1,640
      - Standard gold deposits of government evaluated at fixed exchange rate and gold price (Lek mns.) 8/ (Dec-03, Mar-04): 1,619 1,617
      - Standard gold deposits of government at current exchange rate and gold price (Lek mns.) 8/ (Dec-03, Mar-04): 1,619 1,640
      - Number of ounces of gold equivalent (Dec-03, Mar-04): 36,484 36,438
  - Assets held at deposit money banks (Dec-03, Mar-04): 2,621 2,700
    - Deposits 9/ (Dec-03, Mar-04): 1,757 1,624
      - Deposits in domestic currency (Dec-03, Mar-04): 912 70
      - Deposits in foreign currency evaluated at program exchange rates (Dec-03, Mar-04): 1,666 1,354
        - In foreign currency evaluated at current exchange rates 7/ (Dec-03, Mar-04): 1,666 1,349
    - Loans from government to DMBs (Dec-03, Mar-04): 500 493
    - DMB payables to government (Dec-03, Mar-04): 364 583
- Deposits of HHI and SSI (Dec-03, Mar-04): 2,230 2,833
- Stock of Net domestic credit to central government (1+2-3-4) (Dec-03, Mar-04): 268,102 273,867
  - Change since December 2003: ...5,765

### Memorandum exchange rate and gold price items (selected)
- Current exchange rate (Lek/SDR, eop): 158.1104 157.5252
- Current exchange rate (Lek/US dollar, eop): 106.4               106.4
- Program exchange rate (Lek/SDR, eop): 10/158.1104 158.1104
- Program price of gold (price in SDRs dollars per ounce as at end-December 2003): 280.6 280.6
- Market price of gold (price in US dollars per ounce): 417.0 423.0
- Current exchange rate (US dollar per SDR, eop): 1.4860 1.4805

*Source: IMF staff report/attachment text provided in the content unit.*

### 0.8 percent of GDP. The fiscal deficit is expected to decline further in the coming years, with

### _cr04206 - 0.8 percent of GDP. The fiscal deficit is expected to decline further in the coming years, with

### Fiscal outlook and public finances
- Fiscal deficit: "0.8 percent of GDP."
- Authorities' target: "reach 4 percent of GDP by 2007."
- Policy stance: allocate revenue gains from tax-administration reform to spending only after they materialize.
- Expected effects: gradual increase in national savings and facilitation of expansion of credit to the private sector.

### Public debt trajectory and composition
- Debt-to-GDP ratio: decreased from "76 percent in 1998" to "57 percent in 2003."
- Authorities' aim: reduce debt burden to "53 percent of GDP by 2007."
- Privatization proceeds: at least half of all future large privatization proceeds to be devoted to additional debt reduction.
- Currency composition: "About 2/3 of the overall public debt is denominated in local currency."
- Staff sustainability analysis: points to a stable public debt in most adverse scenarios, contingent on unvarying output growth and continued fiscal consolidation.

### Structural reform priorities
- Authorities’ main policy priority: advance steadily with the structural reform agenda.
- Rationale: take advantage of the favorable macroeconomic situation to speed up reforms and complete important restructurings that hinder performance.

### Privatization and legal framework changes
- Recent action: sale of the Savings Bank to a private international investor.
- Use of proceeds: allocated to reduction of the debt and to capital spending.
- Legal modifications: approved for sell-off of Albtelecom and AMRO to:
  - enhance transparency of the privatization process;
  - enable foreign strategic investors to buy the entire "76 percent stake of Albtelecom" and at least "51 percent of AMRO shares";
  - provide for an open international tender and set clear criteria for the evaluation process.

### Energy sector reform
- Implementation progress: continued advances during first six months of 2004.
- KESH actions: significantly expanded its electricity distribution network; expects to complete installation of the remainder of the network by the end of the year, with financial assistance from Italy.
- Performance: for more than "21 months, KESH has been able to meet all the economic and financial objectives agreed with the donor community."

### Financial sector reform and supervision
- Achievements:
  - Successful privatization of the Savings Bank.
  - Speedy implementation of the Supervisory Development Plan for improving banking supervision.
  - Establishment of a Deposit Insurance Agency.
  - Satisfactory progress in implementing the Institutional Development Program to improve bankruptcy procedures and arrangements for secured financing.

### Financial intermediation, payments, and informal economy
- Objectives: increase financial intermediation and develop an efficient payments system to channel savings to the corporate sector.
- Benefits: reduction of the size of the informal economy and improved law and tax enforcement.
- Cooperative initiative: authorities, central bank, and banking and private business communities agreed to work with the World Bank Group in the "Convergence" program.
- Administrative change: initiation of arrangements for payment of government wages through the banking system to facilitate financial intermediation and reduce cash transactions.

### Business climate and administrative reform
- Priority: improvement of the business climate to boost private-sector activity.
- Measures: reduction of administrative barriers to investment and business creation.

### Tax, customs, and expenditure management reforms
- Timeline: gradual modernization initiated since late-2003.
- Scope: modernization of tax and customs administration and the expenditure management system.
- Reform agenda includes:
  - tax revenue mobilization efforts;
  - expenditure management enhancements;
  - anti-corruption measures.
- IT program: increase use of information technology to facilitate tax enforcement and reduce scope for discretion.
- Statistical cooperation: cooperation with Italian statistics experts to improve national accounts methodology.

### Legal framework and enforcement against organized crime and corruption
- Major steps:
  - New anti–Mafia legal package: improvements to the Criminal Code and amendments to the Code of Penal Procedures.
  - Special draft law on measures against organized crime, trafficking, terrorism and corruption prepared with foreign assistance.
- Objectives: enhance efficiency of judicial bodies and law enforcement agencies.
- Innovations: provision for blocking and seizure of assets deriving from illegal activities.
- Notable progress: "no single instance" of human trafficking reported since 2003 by either the country’s police or by neighboring countries.

### Public-employee wages policy
- Recent decision: introduction of public-employee wage indexation.
- Rationale: maintain incentives to work in the public sector and avoid quality employees fleeing to the private sector.
- Context: introduced against backdrop of a low and declining inflation rate and a robust expansion in economic activity.
- Assessment: unlikely to have a significant adverse impact on the economy or the budget in the short term.
- Caution: authorities consider indexation a temporary measure because of possible longer-term negative effects of automatic wage indexation.

*Source: _cr04206 - 0.8 percent of GDP. The fiscal deficit is expected to decline further in the coming years, with*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04206.pdf_